Here’s a follow-up question to a topic I’ve discussed before which is exactly what I’ve been asking you to do! I want to make sure that you understand every aspect of a planning tool even if I’ve already talked about it. In other words, if someone asks a question and my answer causes you to have even more questions…let me know!
Some of these issues are complicated, especially when taxes are involved so read on and you’ll receive even further clarification on a very common topic.
Our house is in an irrevocable trust that you prepared for us. I understand from your past LISTEN TO LAWRENCE LETTERS that, upon our deaths, my two kids, who are both the sole trustees and beneficiaries of my trust, will receive a step-up in tax basis on our house. However, does it matter if the trust sells the house and distributes the proceeds or if the house is distributed to them first, and then they sell the house directly? I’m not sure if they would get the stepped-up basis in both situations.
The trustees (your two kids) will have the discretion to either sell the house within the trust or distribute the house to themselves and sell it on their own. In either event, the step-up in basis is preserved. But note that in a joint trust (two grantors), there will be a ½ step-up in tax basis on the first death (value on that date) and a second step-up in tax basis on the other half valued on the date of the second death. Understand that if the house went up in value between the first and second deaths, there may be a small capital gain on the first half. Not much we can do about this if you wish to protect the house from Medicaid.
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