I do tax accounting and tax resolution primarily in Pittsburgh and Western PA
While you were going on with life, the IRS made a change to the tax treatment of some inheritances with Revenue Ruling 2023-2.
This ruling pertains to assets held in an Irrevocable Grantor Trust. These trusts are typically set up by one's lawyer in order to protect assets from being included in a decedent's gross estate, as well as not be subject to Medicaid spend down rules or being subject to the claims of a beneficiary's creditors.
A common example would be a home where one spouse has died, and the surviving spouse needs to be placed into a nursing facility due to worsening physical or mental disability.
Under Section 1014 of the code, which governs assets that are subject to the rules of a deceased grantor's (such as the surviving parent) gross estate, an asset, such as a home, receives a "step-up" in basis upon the death of the surviving parent. This means that instead of the house receiving the parent's basis (the price the parents paid for it way back in the day), the inheriting son or daughter automatically receives it at the market price of the home on the date of their parent's death. It is also treated as a long-term capital gain, even though the inheriting son or daughter may not have lived in it for many years and sells it within a year of the passing of their last surviving parent. This is how most assets pass after the death of a parent or parents.
But let's say the parents, while aging but still lucid, upon counsel from their attorney, place their home in an Irrevocable Grantor Trust in order to protect it from the increasingly onerous Medicaid spend down laws. The home transfers in (or is "granted" to the trust) at Mom and Dad's basis, which is what they paid for it back in the day, plus any major expenses such as a remodeling or additions.
When Mom finally passes (assuming Dad passes before Mom) per Revenue Ruling 2023-2, instead of receiving the "stepped up" basis as in the prior paragraph, the home retains the basis of its grantor, and the rest is tax taxed as gain. For a trust, this is quite high, and there are no long-term gain rates for a trust either. All trust income and gains are at the same rates which are as follows for 2023-2024:
$0-$2,900- 10%
$2,901-$10,550-24%
$10,551-$14,450-35%
$14,151+-37%
So, to put some numbers to the prior percentages, let's say the house in the example is worth $100,000 including the original basis, several remodeling jobs and a small addition (all of which there are records for to prove!), and the house sells for $450,000 in today's market. A gain of $350,000. Not as big as many, but not too shabby either.
The first $2,900 would result in $290 in taxes.
The next $7,649 ($10,550 minus $2901) would result in $1,835.76 in taxes.
The next $3,899 ($14,450 minus $10,551) would result in $3,899 in taxes.
The remainder ($350,000 minus $14,451 or $335,549) would result in $124,153.13 in taxes.
Add them up you get a haircut of $290+$1835.76+$3899+$124,153.13=$130,177.89 in taxes by placing the assets in an irrevocable trust vs. well, nothing for passing them along outside of a trust, especially if sold immediately.
Of course, a case can certainly be made for the fact that if left outside of the trust and the home has to be liquidated once Mom is placed in long term care never to return that $219,822.11 ($350,000 minus $130,177.89) is better than nothing, and that is certainly true as well.
The bottom line is that both options, put the assets in a trust or leave them outside, is an important decision worthy of much consideration before making such a move, along with a sobering acceptance that the wind could blow in an unfavorable direction for either option down the road.
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