Can I apply a capital loss against my father's trust?
by Edward Melia, CPA
I am the trustee of a living trust established by my father, who recently died. He left me with mutual fund bonds currently worth $20,000, but he bought them for $25,000. Could I sell the bonds and apply the $5,000 loss toward my father's tax returns?
My condolences on the death of your father.
Regarding the bonds, technically there is no loss if you sell them for $20,000. Here’s why:
A living trust is a revocable trust during the life of the person who set it up. That means only the individual who created the trust can alter or revoke it. From an income tax perspective, the trust is not an entity during the life of the individual who created it. All the income, deductions and credits of the trust are deemed to have been received by the individual who created it.
But at that person’s death, the trust becomes irrevocable, and it also becomes an income tax entity. The trustee must file an income tax return for the trust if its gross income is $600 or more.
Since your father died, the bonds are now an asset of the trust, assuming they have not been distributed to you. The income tax basis of those bonds is the fair market value of the bonds at the date of your father’s death—not what he paid for them. If the fair market value of the bonds at the date of his death was $20,000 and the trust sells them for $20,000, there is no loss, even if your father originally paid $25,000 for them. (Incidentally, there is no capital gain if the bonds were worth, say, $30,000 at the time of your father’s death and sold for that amount.)
If, however, the trust sells the bonds for, say, $19,000, the trust will have a long-term capital loss of $1,000, which the trust may apply to offset any capital gain when it files its final income tax returns. If the trust does not need the loss to offset capital gain, the loss is passed on to the beneficiaries, who can then use it to offset their own capital gain on their income taxes when the trust files its final income tax return. Regardless, you cannot apply the loss against your father’s final income tax return.
Edward A. Melia is a certified public accountant and an attorney in Sacramento. You may contact him at (916) 441-2006 or at .email@example.com..
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