Am I paying capital gains on inheritance, or on a gift?

Question

Hi everyone,My wife's father passed away in 2000. His 90 acre farm was put into a trust with his current wife as the trustee. At the time of her death, the trust would transfer to my wife and her sister. Due to family friction she chose to transfer the farm to my wife and her sister and the trust was dissolved. This was two years ago. My question is, if we sell the land, will capital gains be based on the land value at the time the trust was created (2000) as inheritance, or will it be calculated from the time the property was handed over to my wife and sister (2015)? I hope this makes sense. Any help or advice would be greatly appreciated.Thanks guys!

Michael Plaks · Answer

@Chad Walker

We may not be using the terminology in the same way. You keep saying trustee, but trustees are administrators, not owners. What is important to clarify is who was the owner in 2000 - which is called beneficiary.

There're two possible scenarios. Your father-in-law could have made his wife the beneficiary for the duration of her life (in other words, she would own the farm as long as she lives), and arrange for the farm to go to the children after the wife's death. In this case, your wife was not an owner until 2015. Your holding period starts in 2015, but the tax basis is the 2000 value, because your wife essentially received a gift from her step-mother and must use the step-mother's tax basis.

The other scenario is that the children became the beneficiaries in 2000, and the step-mom was merely a trustee - i.e. managing the trust but not owning the farm. In this case, your wife became an owner in 2000, and you use both 2000 value and 2000 date for tax purposes. Also, your wife would have been reporting half of the farm's income/loss since 2000 if that was the case.

I think it's the first of the two scenarios. Either way, you're looking at the 2000 value.

There's a small possibility of a third scenario: that 2015 transfer legally constituted an act of inheritance, depending on the trust setup and OH state law. This needs to be discussed with a local estate attorney, and I'm not one (luckily).

Brandon Hall · Answer

@Michael Plaks @Chad Walker Michael did a great job explaining. I want to add a third scenario.

Depending on the type of trust that was set up, if the property was moved into the trust *prior* to death in 2000, you could be looking at a situation where you retain the father's original basis.

If the trust was established and the property moved into it after death, you can ignore this scenario.

Best to have some one check it out for you.

Brie Schmidt · Answer

@Brandon Hall ?

Chad Walker · Answer

Thanks for the replies everyone. Really appreciate you taking the time to outline the different scenarios for me!

Chad Walker · Answer

Thanks for the quick reply Brandon! My wife's name was not on the original trust. Her fathers wife was the only trustee listed. The trust was dissolved and ownership transferred on 2016.

Brandon Hall · Answer

@Chad Walker Just to be clear - the trust was created, and the property was transferred, at the time of father's death? If so, your basis will be your allocable share of the basis in year 2000.

Am I paying capital gains on inheritance, or on a gift?

Am I paying capital gains on inheritance, or on a gift?

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