Mutual funds currently valued in excess of $500,000 to be distributed in 2024 “in kind” from a NQ irrevocable trust established in 2012 with a cost basis of $167,000. Must the beneficiary hold the asset for one year to get capital gains treatment? Is the CG based on the original purchase date and cost, or the gain from its date of distribution?
Mark. Suggest you hire an accountant, as the answer to your concern will depend on several factors, to include state laws on trust asset transfers upon death of the grantor, the kind of irrevocable trust it was originally set up as, the actual provisions of the trust document and whether holding period would transfer with the mutual fund shares when transferred in-kind. There’s enough $$ involved to make it worth an accountant, as an error here could get expensive.
Permalink Submitted by BruceM on Fri, 2024-04-12 16:34
Yes and no
If this is a Sec 409A deferred compensation plan, contributions to it over the years past were directed by the employee into the deferred comp plan, usually held (and owned) by the employer in a Rabbi Trust. Distributions from the plan, whether in cash or in-kind, will be treated as ordinary income. The reason for in-kind distribution is to prevent the trust from being subject to tax on realized gains. Once you receive the shares, their market value will be their basis and the usual 1 year holding period prior to sale required for any gain (or loss) to be treated as long term.
Permalink Submitted by Mark Mannarelli on Sat, 2024-04-13 01:33
Bruce, thank you for your reply. To clarify, the source of the original contribution to an irrevocable trust was a grandmother who put $167,000 of after tax money into a trust. Over the last 12 years, the trust (invested in mutual funds) grew to $512,000. The grandmother has since died and the beneficiary (her grandson) has reached an age of majority and is ready to inherit the proceeds. If the mutual funds are transferred “in kind” to the grandson and held for 1 year, does he pay ordinary income on the gain to the date of distribution and capital gains on the growth for that year? Or does he get capital gains treatment on the entire growth of the investment (future FMV less original cost basis $167,000)?