On behalf of Bebout, Potere, Cox & Bennion, P.C. posted in estate planning on Monday, January 9, 2017.
You may have gone through the work of creating a revocable trust. However, unless you have retitled assets in the name of that trust, all you have is essentially a piece of paper describing a trust that you intended to create, but failed to set up because it was left unfunded.
Our law firm goes the extra measure. We encourage our clients to work with a team, including professionals such as a financial advisor, to ensure that they follow through on the practical aspects of setting up an estate plan. The preliminary questions we help our clients answer are whether an irrevocable or revocable trust would best suit their needs, and the specific assets that should be transferred into those trusts.
As background, assets in a revocable trust remain within the owner’s control during his or her lifetime. That means that the asset could be retitled any number of times. A transfer into an irrevocable trust, in contrast, is permanent. The irrevocable trust is deemed a separate tax entity, and any income it generates above a certain threshold may incur tax liability. In addition, assets placed into an irrevocable trust do not receive a stepped-up basis. They are more akin to gifts, which carry the giver’s original basis.
Let’s consider the example of a primary residence used to fund a revocable trust. A surviving spouse might be named as the beneficiary, and children or other loved ones might be named as the successor beneficiaries. Upon the grantor’s death, the real estate will transfer to the beneficiary without having to go through probate.
Best of all, since the real estate was a primary residence, it receives a stepped-up basis. That means that if the home is sold, any gain will be based on the profitable difference between the sale price and the fair market value at the time of the trustor’s passing, rather than trustor’s (presumably much lower) original purchase price. The stepped-up basis usually translates into less capital gain.