Recognizing Income From an Irrevocable Trust at the Grantor’s Death

Carol A. Cantrell (attorney and shareholder, Texas) has published her article entitled Gain Is Realized at Death, Trusts & Estates, Feb. 2010, at 20. 

An excerpt from the article is below:

In my opinion, the available authorities now strongly suggest that the death of the grantor of an irrevocable grantor trust with an outstanding note balance is a “part sale-part gift” occurring on the last day of the grantor’s taxable year.  The grantor realizes gain equal to the excess of the note balance over his basis in the property.  That gain constitutes [income in respect of a decedent], which the grantor’s estate or successors recognize when they collect the note payments.  And the trust’s basis in the property is the greater of the note balance of the grantor’s basis in the property on the date of death.