The question says that income, realized capital gains and estate assets (on death) are taxed at 20%. In revocable trusts, cost basis of investments steps up to current market value upon grantor’s death, and are subject to estate tax. In irrevocable trusts, cost basis won’t change and assets are not subject to estate tax.
The grantor has placed shares with $2mn (market value) and $200k (cost basis) in both a revocable and irrevocable trust and has an immediate objective of selling $1mn of shares while minimizing total taxes.
I answered that it doesn’t matter which trust he sells the shares from to achieve his object, since, if he sold from the irrevocable trust, he’d get charged capital gains tax on the difference between market value and current cost basis, while if he sold from the revocable trust, the same cost basis would be used since this is a sale before his death. Additionally, since this is a sale before his death, estate taxes shouldn’t come into the equation.
However, the answer says that irrevocable trust shares aren’t subject to estate tax, while the cost basis on shares in the revocable trust will step up to current market value upon the grantor’s death, thereby reducing tax expenses when selling from the revocable trust, and therefore selling from the revocable trust is most appropriate for achieving the objective.
What am I missing here?