When Do You Lose the Step-Up in Basis With a Florida Trust?

The step-up in basis is one of the most powerful estate planning mechanisms you should be aware of, and it can help your beneficiaries avoid crushing capital gains taxes. While this benefit is “automatic” in many cases, your family members may lose access to it if you create a trust. When exactly does a trust cause your family to lose the step-up in basis? This is a question you might want to ask an experienced estate planning lawyer in St. Petersburg.

Why Is the Step-Up in Basis So Important?

If you’re not familiar with the step-up in basis, it’s important to gain a solid understanding of this tax benefit before moving forward with your estate plan. The step-up in basis effectively wipes out capital gains obligations for your beneficiaries by “stepping up” the purchase price to its market value as of your passing.

For example, you might have purchased shares in an S&P 500 ETF for a total of $10,000. If those shares are worth $100,000 when you pass away, your loved ones would face capital gains tax on $90,000 without the step-up in basis. Instead, the IRS “steps up” your initial purchase price from $10,000 to $100,000, leaving no capital gains taxes for your loved ones to worry about.

Which Trusts Eliminate the Step-Up in Basis?

Standard irrevocable trusts eliminate the step-up in basis. Medicaid Asset Protection Trusts (MAPTs) also do not benefit from the step-up in basis. Other examples include Irrevocable Life Insurance Trusts (ILITs) and Charitable Remainder Trusts (CRTs). An irrevocable trust removes your assets from your personal estate, and since the step-up in basis only applies to your personal estate, you lose access to this tax benefit.

Which Trusts Maintain the Step-Up in Basis?

On the other hand, revocable living trusts maintain the step-up in basis. This is one of the most popular estate planning tools, and the IRS views revocable living trust assets as part of your personal estate. As a result of this personal connection to the trust, your loved ones continue to benefit from the step-up in basis. However, many irrevocable trusts also benefit from the step-up in basis despite their legal “disconnection” from personal estates. Examples include Intentionally Defective Grantor Trusts (IDGTs) and Qualified Terminable Interest Property Trusts (QTIPs).

Caveats to Consider

Just because a certain type of trust might eliminate access to the step-up in basis, this doesn’t mean you should completely write this estate planning strategy off. The trust in question may offer benefits that completely outweigh the step-=up in basis, and you should carefully consider your personal goals and unique circumstances when choosing a specific type of trust. You should also remember that the step-up in basis only becomes an issue when or if your beneficiaries plan to sell the assets, which may not be the case.

Can a St. Petersburg Estate Planning Lawyer Help Me?

An estate planning lawyer in St. Petersburg may be able to help you and your family maintain the step-up in basis, even after creating a trust. While certain types of trusts cause your beneficiaries to lose the step-up in basis, others have no impact on this key tax planning mechanism. Determine the most appropriate strategy for your family’s unique needs by contacting Drude Tomori Law at 727-300-8900. Outside of St. Petersburg, we also serve residents of Lakewood Ranch, Bradenton, and Sarasota.

Source: 

irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances