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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3911
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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THESE QUESITONS ARE FOR EXPRERT NPVAdvisor . IS THERE A KIND

Resolved Question:

THESE QUESITONS ARE FOR EXPRERT NPVAdvisor  ONLY...


 


IS THERE A KIND OF TRUST THAT A HUSBAND AD WIFE CAN DEED A PRIMARY RESIDENCE TO BEFORE ANY SPOUSE DIES AND THAT WILL GIVE A STEPPED UP BASIS TO THE TRUST. IF YES: 1. WHAT IS THIS TRUST CALLED? 2. WHAT TAXES DOES THE TRUST HAVE TO PAY DURING THE LIFE OF THE HUSBAND AND WIFE? 3. UPON THE DEATH OF THE FIST SPOUSE,IS THERE ANY TAXES THE TRUST HAS TO PAY? 4. WHEN THE TRUST SELLS THE HOUSE THREE YEARS FROM THE DEATH OF THE FIRST SPOUSE, WHAT TAXES DOES THE TRUST HAVE TO PAY ? THANKS EPHRAIM THESE QUESITONS ARE FOR EXPRERT NPVAdvisor ONLY

Submitted: 1 year ago.
Category: Tax
Expert:  Richard replied 1 year ago.
Welcome! My goal is to do my very best to understand your situation and to provide a full and complete answer for you.

Hi there. I see that you have requested a specific expert only. Your requested expert does not seem to be picking up your question. Would you like help from another expert? Thanks.
Customer: replied 1 year ago.

I HOPE LANE WILL RESPOND SHORTLY. THANKS FOR ASKING

Expert:  Richard replied 1 year ago.
No worries! Take care!
Customer: replied 1 year ago.

SINCE I DID NOT HEAR FROM THE ATTORNEY I HAD PREVIOUSLY DEALT, PLEASE ANSWER MY QUESTIONS. THANKS EPHRAIM

Expert:  Lane replied 1 year ago.

Hi, look like finally made its way to me...

Sorry I received no notice (you may want to mention this to customer service ... I was told that I would get a lock on any questions where I was requested)

OK, to the questions:



IS THERE A KIND OF TRUST THAT A HUSBAND AD WIFE CAN DEED A PRIMARY RESIDENCE TO BEFORE ANY SPOUSE DIES AND THAT WILL GIVE A STEPPED UP BASIS TO THE TRUST. IF YES: 1. WHAT IS THIS TRUST CALLED?

The way the trust (any trust that is irrevocable) will get a step up, is if it received the asset through inheritance. Think of any irrevocable trust as a person .. it has it's own tax brackets, pays its own taxes on a 1041 (just like a person does on a 1040) and just like any other entity receiving an asset at death, gets a step-up in basis.

This is simply because it is a separate taxable entity (grantor trusts and other revocable trusts - where the grantor can simply revoke everything is just a pass-through, an alter-ego of the grantor, all taxes pass through and are paid BY the grantor) but an IRRevocable trust is like a separate person, so it gets a step up. Lots of different types of trusts are irrevocable, but it's the irrevocable part, that allows for the trust to get a step up a death, just like any other separate entity.





2. WHAT TAXES DOES THE TRUST HAVE TO PAY DURING THE LIFE OF THE HUSBAND AND WIFE?

Again ... IF ... the trust IS irrevocable it pays taxes on it's 1041 just like a person pays taxes on their 1040. If the trust owns assets that generate interest, it pays income taxes on that interest, just like a person would. The only time it doesn't pay taxes is if the income (DNI, distributable Net Income) is distributed to a beneficiary (through a k-1). IN that case the beneficiary pays the taxes.





3. UPON THE DEATH OF THE FIST SPOUSE,IS THERE ANY TAXES THE TRUST HAS TO PAY?

Again, it all has to do with whether assets have been re-titled to the trust (either through gift, or through sale, or through inheritance) The trust will pay taxes on any income it has IN IT's NAME - owned by the trust - for a tax year ... again, that is NOT distributed to a beneficiary.





4. WHEN THE TRUST SELLS THE HOUSE THREE YEARS FROM THE DEATH OF THE FIRST SPOUSE, WHAT TAXES DOES THE TRUST HAVE TO PAY ?

If the trust received the asset through inheritance, it will have received a step-up in basis, and will only be responsible for the gain in value from the date of death of the person that left it to the trust to the date of sale. ... If the trust received the asset through gift (while the first to die was still alive) the basis will be the carryover basis, just as any other giftee ... If the trust bought the asset the basis will be that purchase price, plus any improvements made by the trustee, while the asset was owned by the trust.




If you keep in mind that the terms of a trust determine whether it's irrevocable (or becomes irrevocable at death, or some other event, such as the credit shelter trust we were discussing before) you begin to see that it's about the irrevocable nature (one of MANY possible attributes of a trust) that makes its tax treatment very similar to a person (or a C-Corp), you'll start to see the pattern. It becomes a separate taxable entity.

There are a multitude of trusts out there, but it's the fact that it is, or has become, a separate entity, irrevocable, with the ability to own assets and pay taxes, that causes it to be treated as a fictitious person, an entity (with it's OWN tax implications, its own ownership) rather than all ownership and taxable events automatically just flowing through to the grantor/owner as a conduit.


Hope this helps

Lane

Customer: replied 1 year ago.

HI I AM GETTING VERY CLOSE WITH YOUR HELP TO UNDERSTANDING MY FUTURE ESTATE ISSUES AND POSSIBLE SOLUTIONS.


WITH FOLLOWING HYPOTHETICAL, PLEASE AFFIRM , CORRECT AND EXPLAIN AS YOU HAVE DONE IN YOUR EARLIER OBSERVATIONS:


HUSBAND AND WIFE ,RESIDENTS IN NYS, HAVE THE FOLLOWING ASSETS:
HOME OWNED BY HUSBAND ,
EACH HAVE SEPARATE ASSETS OF IRAS AND NON-IRAS OF LESS THAN ,$5,000,000.
1. UPON THE DEATH OF THE FIRST SPOUSE TO DIE, THE SURVIVING SPOUSE (“SS”) HAS THE FEDERAL AND STATE UNLIMITED MARITAL DEDUCTION. TO PROTECT THE HEIRS OF THE SS, THE SS CAN DISCLAIM $1,000,000 INTO THE CREDIT SHELTER TRUST (“CST”) OF THE DECEASED SPOUSE , THUS REDUCING THE ASSETS IN THE ESTATE OF THE SS.


2, THE TRUSTEE OF THE CST CAN DISTRIBUTE INCOME AND OR CAPITAL OF THE CST TO THE SS, THE BENEFICIARY OF THE CST. THE SS WILL RECEIVE A K-1 TAX FORM AND HAVE TO PAY TAXES ON THE DISTRIBUTION AND THE CST WILL HAVE A DEDUCTION FOR THE AMOUNT OF THE DISTRIBUTION.


3. THE HOME IS IN THE SOLE NAME OF THE DECEASED SPOUSE. THE SS DECIDES TO DISCLAIM THE HOME WHICH IS THEN OWNED BY THE CST, WHICH GETS A STEPPED UP BASIS FOR THE HOME.


4. THREE YEARS AFTER THE DEATH OF THE FIRST SPOUSE, THE TRUSTEE SELLS THE HOME FOR THE SAME PRICE AS THE STEPPED UP BASIS IT RECEIVED WHEN THE HOME WAS DISCLAIMED BY THE SS.
THE TRUSTEE CAN DISTRIBUTE THE PROCEEDS OF THE SALE TOT HE SS WHO NOW HAS TO PAY INCOME TAX ON DISTRIBUTION. THEREFORE, THS DISCLAIMING OF THE HOUSE MAKES NO SENSE, ERGO, THE SS SPOUSE SHOULD SELL THE HOUSE WITHIN TWO YEARS OF THE DEATH OF THE FIRST SPOUSE TO CLAIM THE SS SPOUSE $250,000 CAPITAL EXEMPTION AND THE $250,000 EXEMPTION OF THAT OF THE DECEASED SPOUSE.
QUESTION: DOES IT MAKE ANY DIFFERENCE IN THIS SCENARIO IF THE HOUSE WERE OWNED BY THE DECEASED SPOUSE ONLY OR WAS JOINTLY OWNED?


THANKS EPHRAIM

Expert:  Lane replied 1 year ago.


You have it!

On your question ... it doesn't matter.

Think of it this way ... If they were both alive, BY FILING JOINTLY all of the capital gains (houses, stocks, whatever) are consolidated into one tax return ... income (ordinary AND capital gain) from all their assets, jobs, investments, are consolidated -... doesn't matter whose income it is, or who's bank account the interest is from, it's all consolidated into that JOINT return.

What the two year rule does is let the second spouse take that exclusion as if they were still filing jointly.

Owning jointly isn't the issue. FILING jointly is. SS get's to take the full 500,000 as if there were still a joint return there ... who owned it doesn't matter as long as it was one of them.

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3911
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 10 other Tax Specialists are ready to help you
Expert:  Lane replied 1 year ago.

Thanks and good luck with everything

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