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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10144
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Step up in Basis question on wife's house going to me via a

Customer Question

step up in Basis question on wife's house going to me via a trust, then either house goes to kids, or an indexed fund instead goes to kids - a basis step up:
My wife died. Her will puts her SEPARATE (not community, we are in a community state - Texas) house worth FMV $250K, or equivalent amount of monies, stocks, bonds etc., in a trust where I get the income, and can get the principal if needed (HEMS). Do I get a step up in basis on this?
Fine. If I die, leaving it to our kids, do they get a step up in basis on the house? If I put $250K in an indexed fund in the trust instead, again, do the kids get a step up in basis on the fund when I die? (The trust might 'dissolve' upon my death, not sure on this point - I'd need to read the will again.
Submitted: 9 months ago.
Category: Tax
Expert:  Lev replied 9 months ago.

The issue with using the stepped up basis is whether the property was included into the estate of the deceased person?
If the property was included into the estate for estate tax purposes (regardless if there were any estate taxes and regardless if the estate tax return was filed or not) - there would not be any stepped up basis.

Customer: replied 9 months ago.
What does "property was included into the estate of the deceased person" ? How is not part of the estate of the deceased person, is there a way it is NOT part of the estate. This answer does not explain anything to me so far - it is like the stuff I read and did not understand, hence why I asked the question here.
Expert:  Lev replied 9 months ago.

The property included into the estate of the deceased person - means - it is a part of the estate for estate tax purposes.

If the estate tax return is to be filed - we included that property into gross estate.

That is regardless if the estate tax return is required or not.

For instance - you mentioned the trust - but did not specify if that is a revocable grantor living trust OR irrevocable trust.

If that is a grantor trust - that trust is ignored for income tax purposes - all assets titled to the trust are treated as owned by the grantor and included into grantor's estate.

In this case - all assets are getting stepped up basis.

However - if that is irrevocable trust - which is a separate taxing entity and files its own tax return - assets are not included into the estate - and no stepped up basis in this case.

Let me know if you need any clarification.

Customer: replied 9 months ago.
Sorry, I want to talk to somebody else...your answers are confusing to me - questions instead of answers. so how do I talk to somebody else?
Customer: replied 9 months ago.
ok I am done ...I just want a refund....I am as clueless now as I was before the question....just going in circles here and now you guys want $52 for a phone call? you are beginning to sound like a bunch of scammers.I want a refund.
Expert:  Lane replied 9 months ago.

3300.16 Champion by Dec 13 2016.

I hold a JD (Juris Doctorate, a doctoral degree in the law), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security & Medicare, estate, corporate & tax advice since 1986.

Hi, I can help here!

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Expert:  Lane replied 9 months ago.

You haven't provided NEARLY enough information to answer this question.

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Please don't ask us to oversimplify

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Is the trust you mention irrevocable or not?

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Secondly, you say "If I put $250K in an indexed fund in the trust instead, again, do the kids get a step up in basis on the fund when I die? " without specifying whether a trust is conduit or not.

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Please answered the questions so THAT your question can be answered.

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Said differently, if the trust was irrevocable (and funded appropriately AND done so three years before your wife's death... and that's still oversimplifying) then the corpus of the trust would NOT be a part of her estate.

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In THAT scenario, there is no step up in basis

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Perhaps it would help to understand the legislative intent (the tax POLICY at work here).

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Congress felt, when drafting this law, that if an asset is subject to estate tax (or even could be) because it was owned BY an individual at the time of their passing, then a beneficiary having to pay a capital gains tax the sale of that asset would be unfair (potentially taxed at the estate level and then taxed AGAIN when sold by the beneficiary)

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The reason some put assets in an irrevocable trust is so that they DO NOT actually own the asset when they pass, the trust owns it. Hence, it's NOT part of the estate ... THOSE assets will never be subject to estate tax... Hence no step up for the heir.

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Hope this helps to clarify

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Lane

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Expert:  Lane replied 9 months ago.

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I sincerely ***** ***** has helped!

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Please let me know if you have any questions at all.

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If this HAS helped, I'd really appreciate a positive rating (using that rating request or the stars on your screen)

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That's the only way I'll be credited for the work here.

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Thank you!

Lane

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Expert:  Lane replied 9 months ago.

P.S. ... in looking back at your question I see that you mention the Health Education Maintenance and Support (HEMS) standard.

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This is an indication that this is indeed done as part of the old, (somewhat obsolete, now that we have a 5 million plus exemption and portability between spouses has been made permanent) a/b trust arrangement (sometimes referred to as the credit shelter trust arrangement)

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Because both spouses have a lifetime gift/estate tax exemption, there would be a trust created that would hold the amount OF that exemption as beneficiary of the fist spouse to die.

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Because, if the first spouse left EVERYTHING to the spouse using the unlimited marital exclusion then the exemption of that first spouse to die would be lost ... meaning that when the second spouse to die passed only one exemption would be available (leaving everything above that amount subject to estate taxes).

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But trusts are taxable entities (if they're irrevocable) and get that exemption as well

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So, if a credit shelter trust was set up (which effectively shelters, retains, the credit of first spouse to die ... because it has it's own credit as a separate taxable entity) the trust documents were set up so that whatever the exemption amount was, in the year of death, (changes from year to year) was left TO the trust, so that when the second spouse passes, both that spouse, PLUS the credit shelter trust's own credit, could be used to shield assets from estate tax.

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... thereby doubling the effect of the estate tax exemption

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When I first came into this profession the exemption was only 600,000 ... meaning that by setting up this credit shelter trust, a couple could shelter a 1.2 million estate COMPLETELY from estate taxes (NOT a part of the taxable estate).

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SO given that you've mentioned HEMS, it's likely that this trust WAS done to remove the assets from the taxable estate.

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Given that assumption, there would NOT be a step up in basis on those assets.

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The estate tax exemption is now at 5,450,000 so this technique has become superfluous (more than is needed) for many.

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Not only that, the law has NOW added a clause that lets that credit at the first spouse to die be portable (moved to the second spouse to die, with the checking of a box on the timely filed form 706 - estate tax return).

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This means that for those passing in 2015, the exemption is actually (5,450,000 x 2) = $10,900,000, making the need for the old credit shelter trust planning obsolete for many.

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HOWEVER, because the step up in basis rules were created back when those numbers were MUCH lower, what is happening to many NOW, is that the assets would not be taxable because of those (now very high) exemption amounts BUT that credit shelter planning was never undone ..........

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... leaving beneficiaries not receiving any estate tax benefit AND having those assets not still being removed from the estate, (owned by an irrevocable trust, not the decedent) hence, NOT qualifying for the step up in basis either.

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Hope this additional context helps to clarify

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Let me know if you have questions

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Lane

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Expert:  Lane replied 9 months ago.

Again, if this HAS helped, I'd really appreciate a positive rating (using that rating request or the stars on your screen)

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That's the only way JustAnswer will credit any of the expert users here for our time and expertise (a PORTION of what you've paid them) ... You would NOT be rating the site, you'd be rating me.

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Thank you!

Lane

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Expert:  Lane replied 9 months ago.

Hi,

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I’m just checking back in to see how things are going.

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Did my answer help?

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Let me know…

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Thanks

Lane

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