IRT Step Up In Basis??

[ttbtaxes]

There seem to be a number of elder attorneys advising clients to set up an irrevocable trust while still preserving the Section 121 exclusion. What are they missing?

https://cbmslaw.com/2014/02/28/using-trusts-to-create-an-effective-elder-care-plan/

https://pollockfirm.com/section-121-deduction-qualifying-trusts/

https://www.begleylawgroup.com/2016/...id-planning-2/

https://www.aminovlaw.com/medicaid-planning-for-the-home-irrevocable-medicaid-trust/

[Burke]

What about when a residence is transferred to an irrevocable trust which is set up as an intentionally defective grantor trust? Wouldn't that qualify for exclusion under Reg 1.121-1(c)(3)?

A personal residence is not a viable asset to be transferred to an IDGT since it generates no income.

[ttbtaxes]

What about when a residence is transferred to an irrevocable trust which is set up as an intentionally defective grantor trust? Wouldn't that qualify for exclusion under Reg 1.121-1(c)(3)?

[KC-CPA]

I got all the purchase documents and receipts for improvements included in basis, they actually had really good records to determine basis. Thank You for all your insight I appreciate it.

[Burke]

The beneficiaries could not transfer the assets to themselves, but the trustees might have authority to distribute the assets to the beneficiaries depending on how the trust terms are written. (The trustees/beneficiaries could be one and the same persons. and often are.) If this action were allowed under the trust terms, there would still be capital gains; but it would have been split between the benes, and they probably would have paid less tax than the trust will.

If the trust had transferred the property back to the grantor, then the funds would have been received by the parents; and if they are currently receiving Medicaid funds, the proceeds might have been attached. The only thing I can think of is that perhaps including the clause that the grantor had to approve the sale, might have disqualified the trust as irrevocable since they retained that right. But I am not an attorney and that is a thorny legal question. I think they will find when the 1099-S comes in, it will be in the trust's name and EIN. (It should be, although I have seen cases where it wasn't. Depends on what info they gave the closing company when the house was sold.) The parents cannot have it both ways: either they own the property and the funds are theirs, or it is a trust asset and they do not own. They cannot take a 121 exclusion unless they meet the residence and ownership requirements.

You gave some round numbers for proceeds and basis. Have them put pencil to paper and make sure all sale expenses are deducted, as well as capital improvements, etc. Trust basis would have been grantor's basis plus any improvements after that. Are the original purchase documents available to review? Were taxes, etc capitalized?

[KC-CPA]

I do have a copy of the trust and do not see that any language would help them qualify for an exclusion. I agree with the bad planning comment. Both parents are in assisted living/nursing home, which was the original intent of the trust so they would have no assets. I do believe the beneficiaries could have transferred the assets to the beneficiaries and paid less in capital gains tax but I do not and have not researched anything indicating they can avoid it. They did save money on healthcare costs though.

[Burke]

I do not have the trust document to review, but I believe the attorney is incorrect. Just because it states that they have to approve the sale does not give them ownership. The irrevocable trust still owns the property, and I take it that is how the trustees treated the sale; i.e, they signed the contract on behalf of the trust. Bad planning. The beneficiaries (not the trustees) if all approve, could have terminated the trust and property ownership would have reverted back to the grantor. Then the parents could have sold it and taken Sect 121 exclusion if they qualified, which I doubt they could for two years since they would not have met the ownership test. This action would have also meant the other property would have reverted back to the grantor as well, since they were both in the same trust. In fact, I would question whether an irrevocable trust could give the grantor control of the sale of assets such as you describe, as that defeats the purpose (and shelter from creditors & Estate tax) that it affords. Any research at all on this will state the grantor does not have the right to sell, therefore the proceeds stay in the trust and the trust pays the capital gains tax. There are some different rules about an Income Only Trust, but it does not appear this is one. Get a copy of the trust document!

[KC-CPA]

I also just received an irrevocable trust scenario. In my case, a married couple (both still living), set up an irrevocable trust in 2008. They only have two assets in the trust, a farm property and a resident house. In April of 2019, the trustees (kids) decided to sell the house for $275k and the basis is $225 so there is a capital gain of $50k. Of course the kids and the attorney who wrote the trust disagree (that can't be right), Attorney states that language in trust specify the selling of the property has to be approved by the living parents substantiates they qualify for exclusion from capital gain. In everything I have researched and found, the capital gain of $50k is taxable to the trust, there is no exclusion available. Anyone have any insight or different answer ?

[ATSMAN]

A simple way to remember this is that stepped-up basis requires that the asset be included in the grantor's estate. An RLT is; an IRT is not. The type of trust is determined by the way it is titled at the time it originates, and it states the designation in the trust document. Always get a copy of the trust document before doing anything.

That is a good point to remember. I get involved in these types of issues rather infrequently so I tend to forget! I was put on the spot during a phone call and I was not sure of the answer.

[Burke]

A simple way to remember this is that stepped-up basis requires that the asset be included in the grantor's estate. An RLT is; an IRT is not. The type of trust is determined by the way it is titled at the time it originates, and it states the designation in the trust document. Always get a copy of the trust document before doing anything.

[TaxGuyBill]

That is correct. There is no step up for assets in an Irrevocable Trust.

[spanel]

Following.. I have the same exact thing just dropped off on my desk.

Chris

[ATSMAN]

I am drawing a blank here! It is my understanding that a property (House) that is owned by an Irrevocable Trust does NOT get a step up in basis when it is sold after the grantor's death.

Correct me if I am wrong.