Inheritance of Property from Trust
Hello to the forum and thank you in advance for your help.
A primary residence was placed into a trust upon the death of a family member in the 1960's and had remained in trust until last year when the conditions were met for the grandchildren to inherit the property. The property was then transferred to the grandchildren with the consent of the trustees. The property is now being sold.
I was told by the lawyer handling the transfer that the transfer was essentially an inheritance and that the capital gains would be based on the fair market value at the date of transfer. I was just wondering if this is true or if there would be capital gains based on the appreciation of the house from the time of it's entry into the trust in the 1960's (I think there is an 8 year statute limit on this at any rate).
Thank you for your time.
Warning, the following is by memory which isn't what it used to be
The capital gain is going to be the difference between the cost and the FMV at the time of transfer / sale. There are a number of events that will affect the situation. Firstly, the initial ACB will be bumped to the 1972 V-day value, secondly, the trust will have a deemed disposition every 21 years and this will again bump the ACB (there was an election back in the 90's to allow this to be delayed by another 6 years or so and could affect the ACB if it was applied.) If the estate returns have not been kept up to date and that realization was not done then the 1972 value may still apply to the ACB. The trust may have done capital improvements over the years which would further increase the ACB.
At the time of transfer to the grandchildren the property will transfer at its ACB, unless the Trust elects to transfer it at FMV (and pay the tax on the capital gain in the trust.) This may be at the Trustees' discretion
The trust may also be entitled to claim a principle residence exemption if a named beneficiary (who doesn't have his/her own principle residence) has used the property as their residence. This would be where one of the family has lived in the property and will be based on number oy years and percent of use since 1972 or the following 21 year deemed disposition (1993?.)
it really depends on the situtation and I wouldn't trust the lawyer to necessarily know all the significant considerations, some charge for services and do not know the area. Talk to an accountant that knows trusts, they also do not all practice in this area. I think you are looking at sections 104 and possibly 107 of the ITA (also by memory, I'd have to look for the actual section.)
Hopefully that gives you areas to research.
Thanks a bunch! The PRE applies here and the home was always occupied by a beneficiary for the entire trust period.
The other information is great too because I am interested in trust tax law now and want to know a bit more about how to use it effectively and legally.
You're welcome. A couple additional points, the Trust can only have one PRE and the election must actually be filed with the return (where an individual doesn't have to file the election unless there are allocations / calculations to be made.)