Trust Matrix – Inter vivos Trusts

This table lays out the Income Tax and Estate Tax treatment of various inter vivos trusts (i.e. trusts funded during a taxpayers life).

Inter vivos
Trust Matrix
Estate Tax Inclusion
Excludable from Taxpayer’s Estate Includable in Taxpayer’s Estate
Income Tax Taxation Non-grantor Trust
  • Simple or complex inter vivos trust
  • Incomplete gift Non-Grantor Trust = ING (e.g. DING, NING)
Grantor Trust
  • Intentionally Defective Grantor Trust (IDGT)
  • Revocable Trust
  • QPRT (during initial trust term)
  • GRAT (during initial trust term)
  • CRAT and CRUT (during initial trust term)


Decanting red wine for aeration.
Decanting red wine for aeration. (Photo credit: Wikipedia)

Here from The Trust Advisor is a great definition of decanting:

… just like you decant wine from one bottle into a new container to remove sediment and to allow the wine to breathe, when you decant a trust, you pour the trust assets from one trust into another trust, allowing flexibility in the terms of an otherwise irrevocable trust.

The post discusses Illinois decanting rules, but the concepts carry over to other states with decanting rules.

The American College of Trust and Estate Counsel (ACTEC) has this list of states with decanting statues.

A Brief Overview of a Trustee’s Duties has provided an overview of the duties of a trustee. How many trustees are aware of their responsibilities? How many simply rely on the advice of their attorney or accountant?

For that matter, how many attorneys or accountants are aware of their client’s responsibilities as trustee?

This article provides a simple introduction to some very important topics.

Via: Duties of a Trustee, Wills, Trust & Estates Prof Blog

Holding Period of Assets Acquired from a Decedent

Tax (Photo credit: 401K)

Capital gains and losses are generally classified as short-term or long-term based on the taxpayer’s holding period; capital assets held for more than one year (i.e. one year and one day, or longer) are considered held long-term. Net long-term capital gains are taxed at a lower rate (currently 15% [IRC §1(h)]) than ordinary income tax rates.

For property inherited, taxpayers are automatically treated as having held the property for more than one year. The instructions for Form 8939 read:

If you disposed of property that you acquired by inheritance from someone who died before or after 2010, report the disposition as a long-term gain or loss, regardless of how long you held the property.

In addition, IRC §1223(9) reads as follows:

In the case of a person acquiring property from a decedent or to whom property passed from a decedent (within the meaning of section 1014 (b)), if—

(A) the basis of such property in the hands of such person is determined under section1014, and
(B) such property is sold or otherwise disposed of by such person within 1 year after the decedent’s death,

then such person shall be considered to have held such property for more than 1 year.

As specified above, this rule only applies to property to which IRC §1041 applies. It does not apply to property for which a Section 1022 Election has been made; see here for more information.

When completing Schedule D (or now, Form 8949), the instructions direct taxpayers to enter “INHERITED” in the Date Acquired column (i.e. column (c)). In practice, I have never done this, but instead have entered the decedent’s date of death as the property’s acquisition date. In any event, make sure that the sale is reported as long-term.

This topic was previously covered in Holding Period for Inherited Assets (8/30/2011).

Trust Exemptions

Tax (Photo credit: 401K)

Similar to an individual’s personal exemption, estates and trusts are allowed an exemption amount [IRC §642(b)]. The value of the exemption depends on the type of trust.

Complex Trust $100
Simple Trust $300
Decedent’s Estate $600

It is short-hand to say that a “simple trust” is allowed a $300 exemption; the 1041 instructions read:

Trusts required to distribute all income currently. A trust whose governing instrument requires that all income be distributed currently is allowed a $300 exemption, even if it distributed amounts other than income during the tax year.

In years when a simple trust makes a distribution out of principal, it is considered a complex trust but it still allowed a $300 exemption.

Estates and trusts are not allowed a standard deduction; instead they may only take a deduction for amounts actually paid.

Holding Period for Inheritied Assets

Most taxpayers are familiar with the step-up basis rules for inherited assets [IRC §1014]. Fewer taxpayers are familiar with the holding period rules.

Assets acquired from a decedent (to which IRC §1014 applies) automatically receive long-term holding period treatment when sold (either by the decedent’s estate or a beneficiary). [IRC §1223(9)]

From IRS Publication 544 Sales and Other Dispositions of Asset:

Inherited property. If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it.

From IRS Publication 559 Survivors, Executors, and Administrators:

Holding period. If you sell or dispose of inherited property that is a capital asset, you have a long-term gain or loss from property held for more than 1 year, regardless of how long you held the property.

N.B. Since IRC §1223(9) makes specific reference to IRC §1014, then it doesn’t apply to asset acquired from a decedent to which an executor makes an election to apply IRC §1022 (Treatment of Property from a Decedent Dying after December 31, 2009). In that case, IRC §1022(a)(1) directs that property is treated as having been transferred by gift. The gift rules for holding period [IRC §1223(2)] direct that the holding period tacks on to the decedent’s holding period.

See AICPA Letter Request for Guidance on Modified Carryover Basis Rules under Section 1022, Question #5 “What is the holding period for property acquired from the decedent’s estate?”

Trusts Final Year Issues

The final year of a trust or estate requires some consideration of the different tax treatment of all items of income and deduction. Here are some important things to keep in mind:

  • All income is passed out (via K-1) to the beneficiaries in the final year of a trust or estate. This includes capital gains (which are generally taxed within the trust).
  • All income items (including these capital gains) are passed out net of allowed deductions.
  • Capital losses and excess deductions pass out, and are deductible by the beneficiaries.
  • Passive losses are not passed out, but adjust the basis of interests now held by beneficiaries.