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Irrevocable Trust Asset Basis

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Facts: Client transfers commercial real estate, bare land, with FMV of $500,000 and cost basis of $100,000 into an irrevocable trust. The irrevocable trust has a non related person as trustee. Beneficiaries are clients children. Client files a gift tax return showing FMV at $500,000. Client has only other assets for estate of approximately $200,000 therefore no gift tax or estate tax upon death.

1. What is the land tax basis if the irrevocable trust sells the real estate while the client is still living?

2. What is the land tax basis if the irrevocable trust sells the real estate after the client is dead?

3. What is the land tax basis if the irrevocable trust distributes the land to the beneficiaries after the client is dead and the beneficiaries sell the land?

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Posted · Report post

Hey guys these are not trick questions and I expect the answers are obvious. But, I really would like your comments. The numbers are close to a clients tax situation and although I have an opinion as to the answers I would like to confirm it with other opinions before I call back the client.

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Posted · Report post

>>the answers are obvious<<

When a living person establishes an irrevocable trust, the property transfer is a gift. The trust's basis is donor's with the usual adjustments and limits. The subsequent death of the grantor is irrelevant, so there will be no step-up whether the property is held or distributed.

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Posted · Report post

When a living person establishes an irrevocable trust, the property transfer is a gift. The trust's basis is donor's with the usual adjustments and limits. The subsequent death of the grantor is irrelevant, so there will be no step-up whether the property is held or distributed.

I agree. Unlike a revocable trust, what happens to the donor after the trust is given an asset is irrelevant.

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Posted · Report post

>>so there will be no step-up whether the property is held or distributed<<

That was what I was afraid of and the reason I was asking the question. So setting up an "irrevocable trust" during lifetime only accomplishes freezing the fair market value of the gift for estate tax, form 706, purposes. When faced with this question I realized that all the irrevocable trusts that I had handled were for either life insurance where basis was not important or setup as a result of death where basis had been stepped up. Thanks for your response Jainen and KC. Much appreciated.

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Posted · Report post

>>So setting up an irrevocable trust during lifetime only accomplishes freezing the fair market value of the gift<<

"ONLY"? The non-tax purposes might be much more important than the tax effect. Are they sticking Medicaid for a rich person's care, or securing gifts for a mistress who can not be named an heir, or dodging creditors, or laundering embezzled funds, or hiding drug profits from forfeiture?

If your client has a juicy story like this, please share it. (Or just make one up; we can't tell the difference!)

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Posted · Report post

>>If your client has a juicy story like this, please share it. <<

None of the above... client simply wants the best way to avoid tax and give the real estate to the kids. I was comparing all the various alternatives. Someone had told the client that an irrevocable trust was the way to go. You know, everyone is a tax expert except me.

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Posted · Report post

For that, a 'revocable' trust would probably be better. Those do get the stepped up basis, because they don't actually transfer title until the death of the donor. Lots of non-professionals mix up those two terms without realizing it. Revocable, irrevocable, same thing, right? Like flamable and inflamable, you know? :P

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Posted · Report post

Yes.. a revocable trust was what the client was told to do. Thanks KC.

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