Estate Finance Family Tax Planning Question

Vito Corleone establishes four trusts for his Son, Michael. Each trust provides for discretionary distributions of principal and income to Michael to provide for his health, education, maintenance and support during Michaels life. Family attorney, Tom Hagen, is trustee. Assume all transfers to the trusts were made by Vito, all transfers were completed gifts, and no portion of any of the trusts was included in Vitos gross taxable estate. Also assume that Trusts A, B and C have inclusion ratios of 0 and Trust D has an inclusion ratio of 1.

In 2019, Michael dies, survived by his two children (Daughter and Son). Each trust has the following asset and provides for distribution upon the following terms at Michaels death:

Trust A: One share of the Corleone olive oil company with a fair market value of $1 million and a basis (immediately before Michaels death) of $100,000. At Michaels death, all of the assets in Trust A are distributed to Michaels Son.

Trust B: One share of Corleone Casino, Inc. with a fair market value of $1 million and a basis (immediately before Michaels death) of $100,000. At Michaels death, Michael may appoint the assets of Trust B to any individual or organization including his estate, his creditors and the creditors of his estate. In default of this power, all of the assets in Trust B are distributed to Michaels children equally. Michael does not exercise the power.

Trust C: Olive farm in California with a fair market value of $1 million and a basis (immediately before Michaels death) of $100,000. At Michaels death, Michael may appoint the assets of Trust C to any individual or organization other than his estate, his creditors and the creditors of his estate. In default of this power, all of the assets in Trust C are distributed to Michaels children equally. Michael exercises the power and appoints all of the property of Trust C in favor of his Daughter.

Trust D: Apartment in Manhattan with a fair market value of $1 million and a basis (immediately before Michaels death) of $100,000. At Michaels death, all of the assets in Trust A continue in trust for the benefit of Michaels two children.

What is the basis of each of the four assets in the four trusts immediately after Michaels death and why?