The Listen to Lawrence Letter: Will beneficiaries of an irrevocable trust receive a step up in basis?

November 17, 2022
November 3, 2022 • Volume 3 Issue 87
Here is another irrevocable trust tax question:

CLIENT QUESTION:

Our parents set up an irrevocable trust with their five children as beneficiaries, with three of the children as trustees. The trust assets were invested in a mutual fund after the assets were transferred into the trust. Both parents are now deceased. The trust has its own tax ID number and has filed its own tax return since its inception. Will beneficiaries of an irrevocable trust receive a step up in basis of assets held in an irrevocable trust when they take ownership of the assets?

MY RESPONSE:

The answer is yes and no for the assets held in one of our Medicaid trusts. Here is the simple analysis. It can be more complicated, but you will get the idea.

The tax law says that you get a full step up in tax basis for all assets you own (other than IRAs and other deferred income tax accounts) at the time of your death. It is stepped up from the original basis which is usually what you paid for the asset. You pay capital gains tax on the sale of an asset, on any amount an asset is sold for that exceeds the basis, whatever that is upon the sale. At death, the original basis is thrown out and the basis becomes equal to the value on the date of your death. Assuming the value is higher, the new basis will be higher or “STEPPED UP.’ Unless the assets grow in value after your death there will be no tax paid.

The tax law goes on to say that you also get a full step up in basis for any asset that you gave away but retained control over. We put enough language in the trust to trigger this retained control so that you get the full step up. Yay!

In your case, both parents set up and funded the trust. In such a case, half the assets got stepped up at the first death and the other half got stepped up at the second. It is possible that there may be some capital gains on the first half, representing an increase in value from the date of the first death to the second.

I hope this helps! Please forward this information to your friends and relatives to share these informative answers to some very commonly asked questions.

And, if anyone you know would like to receive this

Listen to Lawrence Letter, just have them email me at

info@davidowlaw.com and I’ll add them to the list!

As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.

Let’s stay connected.

Stay safe!