Question

Arthur purchased a Rembrandt portrait for $ 15 , 000 . Five years ago, when it was worth $ 28 , 000 , Arthur gifted the painting to an irrevocable grantor trust. Arthur is the owner of the trust, but the trust document says it will not become part of Arthur's estate. Which of the following statements is TRUE? The basis of the painting after Arthur's passing will be: $ 15 , 000 $ 28 , 000 Its fair market value on the date of Arthur's passing. Its fair market value six months after the date of Arthur's passing.

Answer 1

The basis of the Rembrandt portrait after Arthur's passing, since it was transferred to an irrevocable trust and specified not to be part of Arthur's estate, will be its fair market value on the date of Arthur's death.

Step-by-step explanation:

When Arthur purchased a Rembrandt portrait for $15,000 and later transferred it to an irrevocable grantor trust when it was worth $28,000, he set the stage for determining the painting's basis in the future. As Arthur is the owner of the trust and the trust document specifies that the painting will not become part of his estate after his passing, the conventional step-up basis that typically occurs upon the death of an estate owner will not apply in this scenario. Therefore, the basis of the painting after Arthur's passing will be its fair market value on the date of Arthur's death. This is due to the fact that, for assets owned by trusts such as the one described, the basis is not stepped up to the date of death value as it would be in a taxable estate.