The Ali family trust was established when Mrs. Ali transferred publicly traded securities with a cost of $100,000 and a fair market value of $250,000 into the trust. The beneficiaries are Mrs. Ali's 30 year old twin daughters, Aida and Fatima. They benefit equally from the income and the capital of the trust. In the current year, Aida purchased Fatima's capital interest from her for its fair market value of $350,000 [(1/2)($700,000)]. The tax consequences of this transaction to Aida and Fatima are:

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Fatima's capital gain is calculated based on the difference between the fair market value at the time of sale ($350,000) and her original basis in the interest, which is half of the trust's original value ($125,000, being half of $250,000). This results in a capital gain of $225,000, of which 50% is taxable, leading to a taxable capital gain of $112,500. Aida's adjusted cost base for the purchased interest is indeed the amount she paid for it, $350,000.

The Ali Family Trust Was Established When Mrs