Basis of Grantor Trust Assets Before the Grantor's Death

Abstract

The government’s Priority Guidance Plan includes an item whether §1014 new-basis-at-death should apply when the status of a grantor trust changes at the grantor’s death. The unstated assumption appears to be that assets transferred from a grantor to the grantor’s trust will have a carryover of the grantor’s basis prior to the grantor’s death. This essay addresses that notion, and whether a grantor’s transfer of assets into a grantor trust in what purports to be a sale or exchange transaction (that is, not a gift) causes the trust to instead have a basis equal to fair market value rather than a carryover basis. The shocking reality is that this question is not clearly addressed in the Code or Regulations, nor by jurisprudence, leaving unresolved the proper application of the basis rules and spawning no small amount of abuse or aggressive transactions.

Keywords: Grantor Trusts, Basis, Rev. Rul 85-13, Nonrealization of Gain or Loss

JEL Classification: K34