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Blogs from April, 2018

Trust
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As an attorney who focuses solely on estate planning, part of my job is to counteract the urban legends that keep people from investigating Revocable Living Trusts (RLT) as a viable estate planning option. Trusts have an infamous reputation of being a tool used by the rich to hide millions of dollars in off-shore accounts. Yes, those Cayman Island trusts exist, but those are few and far between.

A Revocable Living Trust can benefit anyone! By utilizing a Revocable Living Trust to plan your estate, your beneficiaries will be able to avoid the probate process, be able to enact your last wishes without delay, and your legacy will live on exactly how you intended without negative tax implications.

There are some general questions that come up time and again regarding the tax consequences of invoking an RLT. This month, we will explore the relationship between a RLT and capital gains.

Q: Will I lose my capital gains exemption when transferring my primary residence into an RLT?

A: Revocable Living Trusts are considered a “Qualifying Grantor’s Trust” by the IRS. You will be treated as an individual as far as your taxes are concerned while you are alive. As detailed by the Treasury Codes below, your property will receive a step-up in tax basis when it transfers to your beneficiaries upon your death, and as grantors of the RLT you have the power to do anything you want with assets that you put into your trust – even take the assets out of the trust.

  • 1.121–1 Exclusion of gain from sale or exchange of a principal residence.

(3) Ownership—(i) Trusts. If a residence is owned by a trust, for the period that a taxpayer is treated under sections 671 through 679 (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the 2-year ownership requirement of section 121, and the sale or exchange by the trust will be treated as if made by the taxpayer.

  • 1.671–1 Grantors and others treated as substantial owners; scope.

(a) Subpart E (section 671 and following), part I, subchapter J, chapter 1 of the Code, contains provisions taxing income of a trust to the grantor or another person under certain circumstances even though he is not treated as a beneficiary under subparts A through D (section 641 and following) of such part I. Sections 671 and 672 contain general provisions relating to the entire subpart. Sections 673 through 677 define the circumstances under which income of a trust is taxed to a grantor. These circumstances are in general as follows: (1) If the grantor has retained a reversionary interest in the trust, within specified time limits (section 673); (2) If the grantor or a nonadverse party has certain powers over the beneficial interests under the trust (section 674); (3) If certain administrative powers over the trust exist under which the grantor can or does benefit (section 675). (4) If the grantor or a nonadverse party has a power to revoke the trust or return the corpus to the grantor (section 676); or (5) If the grantor or a nonadverse party has the power to distribute income to or for the benefit of the grantor or the grantor’s spouse (section 677).

Revocable Living Trusts are by far the most comprehensive of all estate planning tools. Schedule an appointment today to learn how a RLT can benefit you and your family now and in the future.

Next month, we will investigate property tax exemptions when transferring your primary residence to a RLT.

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