Wednesday, November 26, 2014

Income Tax Basis Adjustment of Trust Assets at Death of Trustor

When a person (“Trustor”) establishes a revocable living trust during his or her lifetime for the Trustor’s benefit and transfers assets of the Trustor into the Trust, the income tax basis of the Trust asset remains the same as when the assets were owned by the Trustor individually.  For example, if the Trustor transfers real estate with an income tax basis of $350,000.00 and Apple stock with an income tax basis of $100.00 per share into the Trust, the income tax basis of these Trust assets remains the same during the Trustor’s lifetime.  In the event the Trust sells the real estate for $375,000.00 and the Apple stock at $115.00 per share during the Trustor’s lifetime, there would be capital gain of approximately $25,000.00 on the real estate sale ($375,000.00 sale price minus $350,000.00 income tax basis and sale expenses) and $15.00 per share capital gain on the Apple stock sale ($115.00 sale price minus $100.00 income tax basis and sale expenses). 
However, what if the Trust sold the assets after the Trustor’s death?  Upon the death of the Trustor, these Trust assets acquire a new income tax basis equal to the fair market value of the asset on the date of Trustor’s death.  This is commonly referred to as the “stepped up basis”.  The reason for the adjustment is that federal estate tax is based on the value of the assets as of the date of death.   If we take the above example and assume the value of the real estate was $375,000.00 and the value of the Apple stock was $115.00 per share on the date of Trustor’s death and the Trust sold the assets after the Trustor’s death for $375,000.00 and $115.00 per share, there would be no capital gain.  Accordingly, it is very important that the fair market value of the Trust assets are determined as of the date of death, particularly when Trust assets are not sold for a number of years after the date of death of the Trustor.
So how does one establish the date of death values?  The best proof of the value of the Trust assets as of the date of death is a federal estate tax return (Form 706) filed with the IRS.  If the return is accepted by the IRS, the income tax basis is the value of the asset as reported on the return.  However, many trusts and estates are not required to file federal estate tax returns.  In that case, written real estate appraisals as of the date of death should be obtained, a written record of the average of the high and low bid price for the stock on the date of death obtained, et cetera.  The Jeffrey Burr law office has over thirty (30) years of experience in administering trusts when a Trustor dies, and the attorneys and support staff of the Trust Administration Department can assist in establishing and documenting the stepped up basis of the Trust assets for future use. 

Monday, November 17, 2014


Jurisdiction is the power of a legal body (a court) to hear and make a judgment or ruling on a case.   The Nevada Probate Courts are only able to hear and adjudicate probate cases that come within its jurisdiction.  The Nevada Probate Court’s jurisdiction is set forth in NRS 136.010:

  1. Wills may be proved and letters granted in the county where the decedent was a resident at the time of death, whether death occurred in that county or elsewhere, and the district court of that county has exclusive jurisdiction of the settlement of such estates, whether the estate is in one or more counties.
  2. The estate of a nonresident decedent may be settled by the district court of any county in which any part of the estate is located. The district court to which application is first made has exclusive jurisdiction of the settlement of estates of nonresidents.

In other words, the Nevada Probate Court may hear and make rulings on cases where (1) the Decedent was a resident of Nevada at the date of death or (2) the Decedent was a non-resident but owns property located within the State of Nevada.

Three simple examples illustrate the Nevada Probate Court’s jurisdiction: 

  1. Decedent A was a resident of Colorado and owned a vacation home in Las Vegas, Nevada.  The Nevada Probate Court has jurisdiction over Decedent A’s probate because the Decedent owned real property in Nevada.
  2. Decedent B is a resident of Nevada at the date of Death.  The Nevada Probate Court has jurisdiction over Decedent B’s probate because Decedent B was a Nevada resident.
  3. Decedent C is a resident of Texas and has no assets in the state of Nevada.  However, Decedent C’s children are Nevada residents.  The Nevada Probate Court does not have jurisdiction over Decedent C’s probate because Decedent C was not a Nevada resident and did not own and property in the state of Nevada.

Should you have any questions regarding the Nevada Probate Court’s jurisdiction, feel free to contact our office.

Wednesday, November 5, 2014

IRS Announces 2015 Estate and Gift Tax Figures

Political junkies probably had a late night last night watching election results.  I’m actually tired from the night before; waiting for the IRS to announce updates to important 2015 tax numbers!   
The IRS recently issued Rev. Proc 2014-61 which reveals many important tax figures, such as the standard deduction figure for income taxes, the child tax credit, the earned income credit, along with a few important estate and gift tax figures.  The number I was interested in is the lifetime exclusion amount, also known as the “exemption” amount which is set by statute at $5 million, but is indexed for inflation.  The IRS determines the inflation rate for this important figure.  This figure for 2015 will be $5,430,000.  That’s an increase of $90,000 over 2014’s figure of $5,340,000.  2013’s amount was $5,250,000, if you’re keeping score.  The estate and gift tax rate of 40% remains unchanged.

Sometimes we also get a change in what is known as the “annual exclusion.”  The annual exclusion is the amount that a person can gift outright to another person during one calendar year without having to file a gift tax return.    This annual exclusion amount remains unchanged at $14,000 per person.

Attorney Jason C. Walker

Monday, November 3, 2014

Asset Protection Update: The Trustee in a Chapter 7 Bankruptcy Can Control and Sell Assets of a Nevada Single Member LLC

In a recent decision by the United States District Court, District of Nevada, in the case of In re Cleveland, that Court affirmed its position that a trustee in a Chapter 7 bankruptcy succeeds to all of a debtor’s rights in such debtor’s single-member LLC.  2014 WL 4809924 (D. Nev. Sept. 29, 2014).  These rights include the power to control the LLC and to sell the assets of the LLC. 
Under Nevada state law, a judgment creditor of an LLC member is entitled only to a charging order to enforce its judgment.  NRS § 86.401.  The charging order is the exclusive remedy, and this is the case no matter if the LLC has only a single-member or not.  With a charging order, the judgment creditor can only claim distributions that would have been made to the member.  In other words, each time the LLC is to make a distribution to a member subject to a charging order, the creditor that obtained the charging order can direct the LLC to make the distribution to it instead of to the member.  The judgment creditor cannot, however, reach the LLC’s assets with a charging order.
The In re Cleveland decision, although decided by the United States District Court for the District of Nevada, does not limit the trustee in a Chapter 7 bankruptcy to only a charging order when it comes to single-member LLCs.  Instead, in a bankruptcy situation, which is governed by federal law and which preempts state law, the trustee is permitted to control and otherwise sell the assets of a single-member LLC – something that cannot be done with a charging order.  This distinction between state and federal law is important and should be considered when forming an LLC and certainly when a member of a single-member LLC is contemplating bankruptcy.
-Attorney Michael D. Lum