Moving stocks to a trust account changes the ownership but usually does not alter cost basis. When a grantor establishes a trust with stock, he typically transfers his basis along with possession of the shares. However, the cost basis is potentially altered by gift tax or when the stock has a lower market value upon transfer than the grantor’s basis. Tax impact as a result of the transferred stock depends on the type of trust.
Basis for stock is ordinarily the original cost of the purchaser plus any commissions paid for the acquisition. You determine taxable capital gains by subtracting basis from the sales proceeds. Capital loss occurs if basis exceeds the proceeds from a sale. A grantor does not owe capital gain tax upon transfer of stock to a trust.
Types of Trusts
The two basic types of trusts are living trusts and testamentary trusts. Living trusts – established during the grantor’s lifetime – are either revocable by the grantor or irrevocable. A testamentary trust is established after a person’s death and is thus irrevocable. Revocable trusts allow the grantors to retain power over assets in the trusts and are therefore called grantor trusts under the tax rules.
Grantor trusts are disregarded for tax purposes. This allows the grantor to transfer assets, such as stock, to the trust without incurring any tax. Conversely, transferring stock to an irrevocable trust may trigger gift tax. The grantor avoids tax on an irrevocable gift to a trust by transferring property with a value that’s less than the annual gift tax exclusion. This amount is $14,000 per year for 2013 and changes based upon the cost of living.
Change in Value
The trust’s basis in the transferred stock is the lower of the grantor’s basis or the market value at the time of the transfer. If the market value is higher than the grantor’s basis, the trust increases the transferred basis of the grantor by the amount of any gift tax paid. Because grantor trusts are revocable and thus ignored regarding tax matters, no change in basis is possible.