Need advice on Trust, Capital Gains and Step-up Basis after parent's death

I've worked with numerous estates, and this situation needs careful handling. The treatment depends on when assets were transferred to the trust. For assets properly transferred to a revocable living trust during your mother's lifetime, they're still considered part of her estate for tax purposes. At death, these assets typically receive a "step-up in basis" to fair market value on date of death. This means capital gains taxes would only apply to appreciation that occurs after death. The stocks should have received a step-up in basis before being sold. If they didn't claim this, the trust potentially paid significantly more in taxes than necessary. The house appears to have been handled correctly with the step-up basis. As for reporting: Final income during your mother's life (pension, IRA distributions before death) belongs on her final personal tax return (1040). Income generated after death (including capital gains from selling assets) would typically be reported on the trust's tax return (Form 1041).

I went through something similar when my uncle passed. I was totally overwhelmed with the tax forms and figuring out basis calculations for all the investments. After spinning my wheels for weeks, I finally used https://taxr.ai to analyze all the documents. Their system was able to identify which assets qualified for step-up basis and exactly how to report everything correctly. They have tax professionals who specifically understand trust and estate taxation, and they caught that about 30% of the assets in my uncle's portfolio hadn't been properly accounted for with step-up basis. Saved us about $12,000 in unnecessary capital gains taxes! They can analyze the original basis documentation, death certificates, trust documents, and sales records to determine the proper tax treatment. Sounds like in your situation, there might be a significant overpayment if the stocks truly didn't get their step-up basis.

I wanted to follow up about my experience with taxr.ai after being initially skeptical. I ended up trying their service for my dad's estate situation, and I'm honestly surprised by how helpful it was. After uploading all the documents, they identified that we had completely missed step-up basis on about $180k worth of investments. Their system automatically generated the amended returns with all the proper documentation, highlighted exactly what had been missed, and calculated the tax refund we were entitled to. The tax professional assigned to my case explained everything clearly and helped me understand why certain assets qualified for step-up and others didn't. What really impressed me was that they caught some complicated issues with stocks that had been through mergers and splits over the years that even our family accountant had missed. Definitely worth it for complex trust and estate situations.

After reading your post, it sounds like your family might benefit from speaking directly with the IRS to get clarification on the step-up basis rules for trust assets. I tried calling them for weeks about a similar issue last year and kept hitting dead ends with hold times of 3+ hours. I eventually used https://claimyr.com to get through to an actual person at the IRS. Their service holds your place in line and calls you when an agent is about to answer. You can see their system in action here: https://youtu.be/_kiP6q8DX5c When I finally got through, the IRS agent explained exactly how step-up basis works for revocable trusts and confirmed that we needed to file an amended return. We ended up getting back a significant amount that had been overpaid. Since your situation involves potentially $250k of unnecessarily taxed assets, it might be worth getting direct confirmation from the IRS.

I need to eat my words about Claimyr being a scam. After struggling for WEEKS trying to get clarification from the IRS about a trust situation similar to yours, I decided to try the service out of desperation. Got a call back in about 90 minutes and was connected to an IRS estate tax specialist who spent nearly 30 minutes walking me through the exact rules on step-up basis for trust assets. Turns out we had completely misunderstood how to report the sale of inherited stocks and were about to overpay by thousands. The agent explained that assets in a typical revocable living trust DO receive a step-up in basis at death, and capital gains should only be calculated on appreciation since the date of death. They even emailed me the specific IRS publications that address this. Saved me a massive headache and potentially thousands in unnecessary taxes.

As someone who just went through this with my father's estate, I strongly recommend having the trustee consult with an estate tax attorney ASAP. The issue of step-up basis for stocks is huge and could mean tens of thousands in overpaid taxes. Assets in a revocable living trust generally receive a step-up in basis to fair market value as of the date of death. This means the "cost basis" of stocks becomes whatever they were worth on the day your mother died, NOT what she originally paid for them. If the trustee sold stocks without applying this step-up, they essentially paid capital gains tax on decades of appreciation that should have been tax-free. The good news is that you can generally amend returns within 3 years of filing to correct this.

Just a heads up based on my experience - if the stocks were held in a trust before your mom's death, but it was a irrevocable trust (not the typical revocable living trust), the step-up rules might be different. Most pour-over wills work with revocable living trusts, but it's worth confirming. We had a complicated situation where my grandma had created an irrevocable trust years before her death, and those assets didn't qualify for the same step-up in basis. Caused a lot of confusion when we were settling her estate.