I "inherited" some rental property as a beneficiary of an irrevocable trust at the time of death. Is the tax basis FMV that day?

Asked almost 4 years ago - Derry, NH

I also can't find any guidelines about determining the FMV. It is now 15 months since the time of death, so a paid appraisal will be a little out of date, but maybe the best possibility. It is an unusual lot with 3 buildings in a town with 700 total residents, so there will not be any similar sales to compare against. Maybe I must make a "reasonable" determination of the FMV, then I will be required to make a case to the IRS in the event that I am audited?

Attorney answers (5)

  1. Charles Edward Mcwilliams Jr.

    Contributor Level 14

    Answered . You should have a local attorney review the trust documents to determine when this trust became irrevocable. In most instances, assets owned by an irrevocable trust would not receive a step-up in basis upon death - however, if the trust did not become irrevocable until the individual (i.e. the grantor) died, there may be a step-up if the assets were included in the grantor's gross estate. This is technical question that will need to be reviewed by an attorney.

    If there is a step-up to the date of death value, you should contact a local appraiser and have them prepare an appraisal dated as of the date of death. They may have a hard time finding comps, but they will adjust the comps accordingly to arrive at fair market value. You should retain this appraisal as documentation of your basis in the real estate. Your first step however, should be to contact a local attorney and have them review the trust documents to determine if the step-up is appropriate.

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  2. Janet Lee Brewer

    Pro

    Contributor Level 17

    Answered . If the trust was revocable until the "grantor" (person who set up the trust) died, then there would have been a step up at the time of the grantor's death. If the trust was a "gifting" trust that became irrevocable immediately when it was established, then in most cases the "basis" of the property was what the "grantor" paid for it, adjusted upward for capital improvements and downward for depreciation and other similar items.

    A qualified appraiser can appraise what the buildings were worth 15 months ago, if that's the relevant date (that is, if the trust became irrevocable when the grantor died). If the trust was irrevocable at the time it was established, then you will need to take a look at the grantor's income tax records to see what values he was using for the properties (for example, what was the value for depreciation purposes, etc.).

    If you do not have complete, accurate records, you will need to find a way to prove the numbers for the IRS if there's an audit.

    The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.

  3. Steven J. Fromm

    Contributor Level 20

    Answered . If this is truly an irrevocable trust hwen established and not by virtue of the death of the settlor, then you take a carryover basis for the property. This would be the adjusted basis of the settlor when the asset was contributed, plus any capital improvements made since contributed to the trust, less depreciation allowed or allowable on the property and improvements. Fair market value would be irrelevant in a irrevocable trust. If this is not the case then you would be allowed a step up in basis at date of death. You should have the document reviewed by an estates attorney to be sure.

    Hope this helps. If you think this post was helpful, please check the thumbs up (helpful) tab below. Thanks.
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  4. Charles Edward Mcwilliams Jr.

    Contributor Level 14

    Answered . jjludman - There really isn't any gray area here. The article you cited is mostly consistent with the comments above, but the laws discussed in that article would not apply since the modified basis rules that are in effect for 2010 did not exist in 2009 when this individual died. It would be very beneficial to have an attorney review the trust agreement and confirm everything is being handled correctly.

  5. Charles Edward Mcwilliams Jr.

    Contributor Level 14

    Answered . jjludman - There really isn't any gray area here. The article you cited is mostly consistent with the comments above, but the laws discussed in that article would not apply since the modified basis rules that are in effect for 2010 did not exist in 2009 when this individual died. It would be very beneficial to have an attorney review the trust agreement and confirm everything is being handled correctly.

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