Revocable and Irrevocable Trusts

[Forensicacctnt]

Regarding a Revocable Trust when the assets of the trust pass to the beneficiaries such as children when the last parent dies, do the assets like stocks, bonds or a home get a step up in basis? Second, I have been told by the estate attorney for my mother for an Irrevocable Trust, when passing to the beneficiaries, the assets do NOT get a step up in basis.

[TaxGuyBill]

I'm not well versed in trusts, but here are my thoughts:

Yes, and yes. A Revocable Trust is basically still owned by the parent. So when the parent dies, it gets a step up in Basis. An Irrevocable Trust no longer belongs to the parent (they can't really change it), it is a separate entity. So when a parent dies, that doesn't change anything in the Trust.


However, there is also such a thing as an "Intentionally Defective Irrevocable (Grantor) Trust". From what I understand, it is treated as an Irrevocable Trust for many purposes, such as income taxes and Medicaid purposes. However, because it is "defective", it DOES get a step-up in Basis when the owner grantor dies.

I don't know the details about how the "Intentionally Defective Irrevocable (Grantor) Trust" works, but you may consider researching it and asking the attorney about it.

[Forensicacctnt]

Thanks very much for the information you provided.
Carl

[Burke]

However, there is also such a thing as an "Intentionally Defective Irrevocable (Grantor) Trust". From what I understand, it is treated as an Irrevocable Trust for many purposes, such as income taxes and Medicaid purposes. However, because it is "defective", it DOES get a step-up in Basis when the owner grantor dies.

Well, not exactly. Here is a good article concerning these. https://petershannonco.com/resources...rantor-trusts/. Note the trust itself does not get a stepped-up basis, but there are ways to transfer assets out of it back to the grantor so that stepped-up basis is achieved. Definitely need a good estate-planning attorney to set one up, and they are not for the average taxpayer. Note the grantor must pay the income tax annually on the trust earnings. Substantial appreciating or income-producing assets are the best vehicle for these, and a potential Estate Tax liability for the grantor should be part of its consideration.