Basis and trust tax records and questions checklist

Start with the property records, then work through beneficiary reporting, elections and trust terms. Use the questions below to check gift records and capital gain treatment before your adviser meeting.

Property basis records

Persons liable for federal tax or its collection must keep accurate basis records. Required records must remain available for authorized IRS inspection for as long as their contents may be material to administering federal tax law. Continuing materiality governs retention rather than a universal fixed number of years.

• Acquisition records: Basis measures your investment in property for tax purposes. Use it to calculate depreciation, amortization, depletion, casualty losses, and gain or loss on disposition. Purchased property usually begins with cost basis. Gifts, inheritances and trust distributions require their applicable basis rules.
• Adjustment history: Track changes from original basis to adjusted basis. Improvements increase basis, while deductions for depreciation or casualty losses reduce basis. Acquisition value alone does not establish basis after subsequent adjustments.
• Inherited value statements: For property otherwise subject to §1014(a), the initial basis ceiling applies when including the property increased federal estate tax liability after credits. Initial basis cannot exceed the final federal estate tax value. Before final determination, it cannot exceed the value identified in a furnished §6035 statement. The ceiling does not require every inherited asset’s initial basis to equal a Schedule A value.
• Schedule A delivery records: Give each beneficiary only the Schedule A reporting that beneficiary’s property. Do not furnish beneficiaries Form 8971 itself. The executor must certify the delivery date on Form 8971 and should retain mailing, delivery, receipt or other relevant evidence. When a beneficiary trust or estate has multiple trustees or executors, delivery to one is sufficient.
• Spousal community property records: For community property owned by spouses, the entire property’s basis generally becomes fair market value at a spouse’s death if at least half the community property interest’s value is includible in the deceased spouse’s gross estate. An estate tax return need not be required for this rule to apply. The entire property adjustment under this spousal rule does not apply to registered domestic partners.

For gift documents, use the gift records question below. Continue with the gift and inheritance basis guide or the spousal ownership guide for related topics.

Estate tax records for income in respect of a decedent

An individual recipient can claim a deduction for estate tax paid on income in respect of a decedent only as an itemized deduction on Schedule A, line 16. Claim it in the same tax year the income must be included in the recipient’s income. Keep the estate tax calculation with the income records.

For capital gain income in respect of a decedent, reduce the gain by the estate tax deduction, but not below zero, when calculating the maximum tax on net capital gain, including qualified dividends. Apply that reduction when calculating the §1202 exclusion and the capital loss limitation as well.

Trust income and distribution records

• Beneficiary reporting: The fiduciary uses the beneficiary schedule for Form 1041 to report each beneficiary’s share of estate or trust income, deductions and credits. Attach the IRS copy to Form 1041, furnish the beneficiary’s copy, and retain a copy. Grantor trusts do not use that schedule to report items taxable to the grantor or another person treated as owner.
• Capital gains allocated to corpus: Capital gains allocated to corpus are excluded from distributable net income, or DNI, only to the extent both conditions below apply.
  • The gains are not paid, credited or required to be distributed to a beneficiary during the tax year.
  • The gains are not paid, permanently set aside or to be used for purposes specified in §642(c).
  Use the capital gains question below to review the inclusion routes and their conditions.

Return package

A domestic estate must file Form 1041 if it has gross income of at least $600, a nonresident alien beneficiary, or a qualified investment in a qualified opportunity fund during the tax year.

A domestic trust taxable under §641 must file Form 1041 if it has any taxable income, gross income of at least $600, a nonresident alien beneficiary, or a qualified investment in a qualified opportunity fund during the tax year.

Holding a qualified opportunity fund investment during the year requires attaching Form 8997. Foreign estates use the U.S. Nonresident Alien Income Tax Return instead of Form 1041. For the grantor reporting exception, see beneficiary reporting above.

Election records

For a §663(b) election, a trust required to file a return must elect in the appropriate place on that return by its statutory filing deadline, including extensions. If no trust return is required, file an election statement with the office where the trust would file. Use the deadline that would apply if a return were required. The election becomes irrevocable after the last day prescribed for making it.

For a §645 election, retain Form 8855 and evidence of the applicable first return deadline. With an appointed executor for the related estate, Form 8855 generally is due by that estate’s first Form 1041 deadline, including an extension granted for that return. The election remains available without an appointed executor. In that case, participating qualified revocable trust trustees make the election using the electing trust’s first taxable year determined under §645. File a properly completed election form by that first return deadline, including an extension granted for the electing trust’s first Form 1041. In either case, insufficient income to require Form 1041 does not remove the election deadline.

Review election effects and eligibility in the trust taxation guide. For a separate payment allocation topic, see the estimated tax allocation question.

Grantor trust and reimbursement records

Retained powers and gift completion

A gift is complete to the extent the donor relinquishes dominion and control and retains no power to change disposition for the donor’s or another person’s benefit. A reserved disposition power can leave a transfer wholly or partly incomplete. Examine the power’s terms and scope separately from income tax ownership. Grantor trust status alone does not establish a completed gift.

Tax payment and reimbursement

When a grantor treated as owner under subpart E pays income tax attributable to including the trust’s income in the grantor’s taxable income, that payment is not a gift to the trust beneficiaries.

If the trust instrument or applicable local law requires reimbursement of that tax, the full value of the trust’s assets is included in the grantor’s gross estate under §2036(a)(1). A dated exception to adverse IRS application of this holding appears in the reimbursement ruling note in Sources.

If the trust instrument or applicable local law instead gives the trustee discretion to reimburse that tax, the discretion alone does not cause gross estate inclusion, whether or not exercised.

Discretion combined with other facts can cause inclusion. Those facts include an understanding or prior reimbursement arrangement, a retained power to remove the trustee and appoint the grantor as successor, or local law exposing trust assets to the grantor’s creditors. Keep reimbursement provisions and related arrangements together for review.

Basis at the grantor’s death

Completed gift property in an irrevocable grantor trust receives no §1014 basis adjustment at the grantor’s death under the facts of the basis ruling in Sources. Its basis immediately after death remains the same as immediately before death.

The ruling concerns appreciated property where the grantor’s income tax ownership power did not cause gross estate inclusion and the asset was not otherwise acquired from or passing from a decedent under §1014(b). Trust liabilities did not exceed trust asset basis, and neither the trust nor the grantor held a note on which the other was obligated.

The asset was not community property. The grantor retained no power to revoke or amend the trust or appoint the asset, and no power causing trust assets to be included in the grantor’s gross estate.

Gross estate exclusion alone is not a universal bar to a basis adjustment. Property from a nonresident noncitizen decedent can qualify if acquired by bequest, devise, inheritance, or another specified §1014(b) route.

Continue with the grantor trust income tax and reimbursement guide for related trust review topics.

Common questions