Listen to Lawrence…Do beneficiaries receive a house in a trust at the value it was when it was place in the trust or the stepped up value?
April 8, 2021
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Dear Clients and Friends,
This is why The Listen to Lawrence Letter is so useful! You will see a very common question below that if not answered correctly, can evolve into the creation of misinformation causing serious and unnecessary concern. When the wrong information is passed around, it creates fear and then eliminates a planning strategy that may actually benefit the person! So, keep the questions coming, even though you think you already know the answer because I am committed to getting the facts out there!
I’ve heard that when a house is placed into an irrevocable trust, the family members (beneficiaries) receive the house at the value when it was placed into the trust and not the stepped up value. Is that correct?
“Hold on, pardner, this is how rumors get started.” 😊 This rumor is absolutely false. What is true is that when the house is placed into the trust, the trust takes the basis that the house had before it was placed into the trust. However, upon the Grantor’s death, the trust beneficiaries still receive a full step-up in tax basis.
Mom puts her house into an irrevocable trust in 2005. She paid $100,000 for the house. This is her initial cost basis. Over the years she added capital improvements of $100,000 dollars (new roof, etc.) Her adjusted basis became $200,000.The adjusted basis for the house in the trust is then $200,000. She dies in 2021 when the house is worth $500,000. The children will receive the house with a step-up in tax basis equal to the value at the date of their mother’s death or $500,000. If they sell the house the next day for $500,000, there will be no capital gains tax to pay.
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