The Burton family trust was created when Mr. Burton transferred publicly traded securities with a cost of $300,000 and a fair market value of $750,000 into the trust. The beneficiaries are Mr. Burton's two sons, Tim and Jerry Burton, both of whom are over 30 years old. They have equal shares in the income and capital of the trust. At a later point in time, when the value of the securities has increased to $2,100,000, Tim purchases Jerry's capital interest in the trust for $1,050,000 [(1/2)($2,100,000)]. The tax consequences of this transaction to Tim and Jerry are as follows:

Question

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When Tim purchases Jerry's capital interest in the trust for $1,050,000, Jerry will realize a taxable capital gain. The gain will be calculated as the difference between the sale price ($1,050,000) and Jerry's adjusted cost base (ACB) in the capital interest. Since the beneficiaries have equal shares in the income and capital of the trust, Jerry's ACB in the capital interest is one-half of the fair market value of the trust assets at the time the interest was acquired.

The fair market value of the trust assets at the time the interest was acquired was $750,000, so Jerry's ACB in his capital interest is $375,000 [(1/2)($750,000)]. Therefore, Jerry's taxable capital gain is calculated as $675,000 ($1,050,000 - $375,000).

When Tim acquires Jerry's capital interest in the trust, his ACB in the interest will be equal to the amount he paid for it ($1,050,000). Therefore, the best choice is D.

The Burton Family Trust Was Created When Mr