(Formerly Standard 16)
PGTS Standard
39. All non-cash assets are consistently recorded in the accounting records as follows:
a. All non-cash assets held in irrevocable trusts (e.g., unitrusts, annuity trusts, matured revocable trusts, or estates) are consistently recorded in the accounting records at fair market value when the asset is placed in the trust or the estate.
b. All non-cash assets held in revocable trusts (or other grantor trusts) are consistently recorded at the trustor’s income tax (cost) basis (a signed statement from the trustor is acceptable for this purpose). [PGTS]
Standard #39 concerns the methods of evaluating non-cash assets when the trust or estate* becomes the legal owner of these assets. Decisions the organization makes concerning these evaluations should be focused on the most practical method required. The principle of the standard is to use the valuation method costing the least amount of time and money. However, at certain times, like with irrevocable trusts, money will need to be spent to determine the value of non-cash assets.
WHAT DOES ALL MEAN?
ALL does mean all assets the trust or estate is the legal owner of or responsible for in probate. This includes trusts that hold assets during the life of the trustor, whether the trust is revocable or irrevocable, and estates that are going through the probate process. Either way, all assets that either the trust or the estate is dealing with must be accounted for and the proper value assigned.
NON-CASH ASSETS
A cash asset is any asset that is liquid and can be readily converted to cash or cash equivalents (i.e., cash, bank accounts, money market accounts, CDs, or other assets that may be readily converted to cash). Non-cash assets are non-liquid and not readily convertible to cash (i.e., real estate, vehicles, artwork, collections). A very common non-cash asset held in a trust (whether revocable or irrevocable) is real estate. Estates may have all the above-listed assets since those assets are applicable after the death of the testator.
PLACED IN THE TRUST OR ESTATE
The timing of when non-cash assets are placed in a trust may vary, but the ideal time is at some point during the life of the trustor. For estates, accounting of non-cash assets will happen after the testator has died and when the personal representative completes an inventory submitted to the probate court. Items a trust legally owns are the trust assets. These assets are not part of the estate and therefore avoid probate. When non-cash assets are placed into the legal ownership of the trust, they must be accounted for on the trustee’s accounting records.
ACCOUNTING RECORDS VALUE
Standard #39 indicates a written method of accounting for trust and estate assets must be established. This article deals mainly with non-cash assets. These non-cash assets must be accounted for when the trust legally owns them. There may also be contingent assets – assets that are not legally owned by the trust but will come into the trust after the trustor’s death. They must be accounted for during the lifetime of the trustor. Examples of contingent assets in a trust are assets held outside of the trust but name the trust as a beneficiary designation such as bank accounts with a payment on death (POD) or transfer on death (TOD) to the trust, investment accounts with an in trust for (ITF) designation to the trust, or life insurance policies naming the trust as a death beneficiary. Contingent assets have a value that is continually changing, so they are generally accounted for at a placeholder value of $1. These contingent assets are accounted for so they will not be missed when the trust is closed after the death of the trustor.
REVOCABLE TRUSTS
Trusts that are revocable use cost basis when evaluating non-cash assets, and they are recorded at the trustor’s income tax cost basis. The signed statement of the trustor declaring their income tax cost basis in the property is what is needed for file documentation.
IRREVOCABLE TRUSTS AND ESTATES
When a testator or all the trustors die, the trust and/or estate become irrevocable, and the only method for valuation of the non-cash assets is at fair market value. Generally, this is determined by a fee appraisal by a certified appraiser (e.g. MAI, SRPA, AI-GRS). This appraised value is usually set at the date of death of the decedent(s), but for estate tax purposes may be the value of the property six months after the date of death. The appraiser will provide the trustee or the personal representative with the fair market value for the non-cash asset. When known, this fair market value must then be posted to the trust accounting records.
COST BASIS
The cost basis for a non-cash asset is the amount the trustor paid for the asset at the time of purchase plus any capital improvements and minus depreciation. There may have been adjustments to the cost basis since the property was purchased or when a capital investment is made to enhance the usefulness of the property. General routine maintenance does not count in the value of the cost basis of the asset. An example of an addition to cost basis would be adding a wing to enlarge a building. In this example, the cost of the addition would be added to the purchase price, and the sum of the two amounts would become the new income tax cost basis of the asset.
SIGNED STATEMENT
Notice the standard calls for the income tax cost basis of the trust’s non-cash asset to be documented in writing and signed by the trustor. This statement of cost basis must be placed in the trust file in the same section as the non-cash asset when it is placed into the ownership of the trust.
CONCLUSION
Non-cash assets held in trust and as part of a probated estate must be accounted for. The income tax cost basis method of evaluation is the less expensive method for establishing the value of non-cash assets when the trust document is revocable. Fair market value is more expensive and is required when a trust document is irrevocable. Estates must always use fair market value since the last will and testament is only active after the testator has died, thus becoming irrevocable.
*The time at which a last will and testament is being probated.