Does Inheriting Through a Trust Mean Losing the Step up in Basis?

A “step-up in basis” can be a confusing topic in estate law for someone who is not a New York estate lawyer.  What it does is help eliminate capital gains taxes on estate assets that have gained value over the lifetime of the decedent so that no money is due to the government for those taxes.  An example of this would be if a parent bought the family home back in the ’70s for $10,000 and it is now worth $100,000.  Instead of considering the $90,000 change in market value as taxable, the tax code “steps up” the value of the property to the fair market value at the time of death.

The reason this law was put into place is that, in a case such as this, the value of the home probably didn’t rise because of investment gains, but rather because of simple inflation.  However, if you take an additional example of someone having a stock portfolio that is initially worth $10,000 and then is worth $100,000 when they die a year later, step-up basis would still apply.  If that same person traded their stock while alive with that much of a jump in value, they would have to pay taxes on the profit.

What becomes complicated is when the property in question is a trust.  Many times a trust may be set up for one person with another person as the beneficiary.  The trustee usually makes investment on the assets in that trust, meaning that it grows during the lift of the trust.  In order to help avoid estate taxes, more and more families are setting up trusts for their loved ones this way, leaving the beneficiary to wonder if they are subject to the step-up in basis.  In most cases, revocable trusts can still have a step-up basis while irrevocable trusts get the carryover basis.

If you have a trust, it would fall under the category of things that your New York estate attorney could help you with when making estate plans for your beneficiaries.  Besides setting up trusts, other things such as giving gifts, donating to charities or having ownership transfers of some property may all be the types of things that can be handled by your attorney.

Even if you think that a strong estate plan is not necessary because of age or good health, it is in your best interest to have one set up in a way where you can be sure that your beneficiaries collect as much as they can out of your estate.  This could be everything from making sure certain people get physical property to setting up a trust, co-ownership of property and life insurance.  Additionally, as tax law changes every few years, it is wise to make sure that you have your plan re-checked by your New York estate attorney to make sure that it still follows proper estate and tax law.

To speak with a New York City estate attorney, call the Law Offices of Albert Goodwin at (212) 233-1233 and set up a consultation today.