The Listen to Lawrence Letter: Clarifying the Step Up in Tax Basis

December 1, 2023
November 21, 2023 • Volume 4 Issue 192

A couple of my readers questioned something I said in a recent LISTEN TO LAWRENCE LETTER. In that letter, I said that all stock in the irrevocable trust will receive a “step up” in tax basis upon the death of the grantor. This is true with all of my “irrevocable Medicaid trusts” but not necessarily true with ALL irrevocable trusts. The key difference is whether the assets in the trust are includable in the estate for estate tax purposes, and if they are you will receive the full step up.

The assets will be includable in the estate for estate tax purposes if the grantor retains the right to the income from the trust, the right to possess the assets in the trust, or has the right to change the people who will inherit from the trust (called a “power of appointment”) after the death of the grantor. All of my Medicaid trusts allow the grantor to change the trust beneficiaries and so all of my Medicaid trusts will provide you with a step up in tax basis.

On the other hand, we often create another type of irrevocable trust (usually for tax reduction purposes) where the goal is to make sure the assets are NOT includable in the estate for estate tax purposes. The assets in these irrevocable trusts do not get a step up in basis at death.

Watch the video below to learn even more about Irrevocable Trusts.

I hope this helps!

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