Step Up in Basis

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One of the key tax protections provided by a Revocable Living Trust is the inheritance of property with a step up in basis. This means that your beneficiaries will inherit any of your property at the market value it holds at the time of your death, rather than the market value it held at the time it was purchased. Were this not the case, your beneficiaries would be required to pay Capital Gains Tax were the property to be sold.

The Capital Gains Tax is imposed on any increase in value of an asset. For example, a house purchased by Jack and Susan for $200,000 in 1990 could in the current year be worth $500,000, even if no improvements were made. This means that if Jack and Susan’s house was not protected by a Living Trust, their beneficiaries would inherit the house at its original value of $200,000. If they were to sell it, it would be reassessed, and they would be required to pay Capital Gains Tax on the $300,000 gain. This can add up to be quite a large sum.

However, were Jack and Susan’s children to inherit the home through the Trust, they would receive it at its value of $500,000, effectively disregarding, for tax purposes, the increase in value. This can save them from paying a very expensive tax.

People often attempt to avoid the inheritance step of Estate Planning entirely by putting their children on the title of the property with them. This, however, can be quite negative in the long run, as it prompts a reassessment of the property with regard to property taxes. This put’s the child in a similar situation as the beneficiaries above, requiring them to pay an increase in property taxes if a child is added or removed from title to a property. Gifting the property can also trigger a reassessment, again putting the recipient in a similar situation. Simply put, for purposes of Estate Planning, the best way for your children or beneficiaries to receive your home following your death is for them to inherit it through a Trust.