Q: Both my parents created revocable trusts during their lifetimes. I am trustee. My father died before my mother. I have learned that the cost basis for my mother's assets can be either her date of death or six months later. I'm unclear regarding the cost basis of assets in a family trust, the trust created at my father's death for use by my mother. The assets of both trusts now go to beneficiaries. What cost basis applies for the family trust?
- C.M., Philadelphia
A: You're right. After a death, the cost basis is the value as of the date of death, or the value as of six months following, if the executor has elected the alternate valuation date.
There are two types of trusts that may be involved, says Kathleen Day, a certified financial planner in Miami. The bypass - or credit shelter - trust would hold the amount that could be passed from your father to beneficiaries without incurring estate taxes.
Usually this type of trust is constructed to pay out income to your mother, and at her death, the principal goes to the ultimate heirs. The assets in this trust are not included in your mother's estate and are assigned the cost basis as of the date of your father's death (or six months later).
Ms. Day says that the second type of trust generally holds the remainder of the estate. It uses the unlimited marital deduction to avoid estate taxation at the first death and the assets are included in your mother's estate. Since the assets in this trust are part of her estate, they would receive a step-up in basis at her death.