Aug. 8, 2023
IRS Eliminates Step-Up In Basis For Some Assets (Episode #285)
Be sure you understand how your heirs might be affected by new IRS rules changing how step-up in basis applies to certain assets.
Be sure you understand how your heirs might be affected by new IRS rules changing how step-up in basis applies to certain assets.
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Well, good afternoon, Michiganders.
It's Tuesday, August eighth, twenty twenty
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three, and of course this is
Tuesday with Tom, Michigan's only weekly podcast
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00:00:42.000 --> 00:00:46.759
where we answered your questions about a
state planning and a state settlement in Michigan.
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00:00:47.640 --> 00:00:51.079
As always, I'm your host,
Tom Doyle, a state planning attorney,
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lifelong Michigan resident, and an ambassador
for all things good in this great
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00:00:56.920 --> 00:01:04.760
state of Michigan. Welcome, Welcome, Welcome to today's program, August August
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eight. Some of you might have
kids going back to school already. Last
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00:01:11.239 --> 00:01:15.000
week's episode, I talked about two
documents that every college student should have,
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00:01:15.239 --> 00:01:19.920
So if you have a child or
grandchild heading off to college, I encourage
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00:01:19.959 --> 00:01:23.640
you to listen to last week's episode
to make sure that they have their legal
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documents that they need to have before
they head off today's show. The IRS
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eliminates step up basis for some assets. But please remember what I'm about to
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discuss is, as always, for
educational purposes only. It is not intended
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to be legal advice. You need
to work with your attorney to determine what
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is appropriate for you and your estate
plan. All right, the IRS has
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eliminated according to recent rules. Step
up basis step up in basis for some
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assets. So let's just start with
what is step up in basis. Well,
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when someone inherits an asset with what
would be considered an unrealized gain,
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that means that the asset has increased
in value over the time that the deceased
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person owned it, the basis steps
up or resets to the current fair market
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value on the date of death of
the deceased, essentially wiping out any tax
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liability for unrealized capital gains. So
choose an example. Let's say that you
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purchase stock for one hundred thousand dollars
more than a year ago. It's gone
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up in value, and let's say
it's now worth two hundred and fifty thousand
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dollars. Well, if you sold
the stock today for two hundred fifty thousand
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dollars, you would have an gain
on that stock of one hundred and fifty
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thousand. You bought it for one
hundred that would be what we call your
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basis. Now in the stock you
sold it for two hundred and fifty the
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difference in that is one hundred and
fifty thousand dollars of profit, and you
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would pay a capital gains tax on
that one hundred and fifty thousand dollars.
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Now, if you left that stock
to your air so you still own it,
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you die in your airs are now
going to receive that stock at the
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time of your death. Their basis
steps up to what it is worth on
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the date of your death. So
in this example, let's say you bought
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it for one hundred thousand dollars,
your heirs receive it, and on the
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date of your death it's worth two
hundred and fifty thousand dollars. Their basis
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in the stock steps up to that
two hundred and fifty thousand dollars, which
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means if they turn around and sold
it for two hundred fifty thousand dollars,
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there would be no capital gains tax
paid. Now let's contrast that briefly too.
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Let's say during your lifetime you purchase
one hundred thousand worth of stock,
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you gave it to your heirs during
your lifetime, or maybe at your house,
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and you gave your house to your
heirs during your lifetime. By doing
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that, you are passing on your
basis to your heirs. So in that
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example, you bought the stock for
one hundred thousand, you gave it to
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your heirs during your lifetime. Their
basis is now one hundred thousand dollars.
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They sell it for the two hundred
and fifty thousand they are paying the capital
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gains tax. Or let's say it's
your house. You bought a house for
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one hundred thousand dollars, you give
it to a child during your lifetime.
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The child turns around and sells that
house after your death for two hundred and
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fifty thousand dollars. Your child is
now paying the capital gains. So essentially,
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what happens when you make gifts of
appreciated assets during your lifetime, you
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are passing on the capital gains to
your heirs, which is why in previous
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episodes of my program and during seminars
if you've ever attended one, I've generally
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indicated that it is normally, normally
again better for your heirs to re see
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I've appreciated assets at your death rather
than during your lifetime. But let's get
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back to stepped up basis and what
the IRIS has recently done. Let's say
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that you have a revocable trust as
part of your estate plan, which is
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the normal trust that is prepared as
part of a regular estate plan, again
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revocable meaning you can get rid of
it, you can change it, you
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can amend it, you're still in
charge of it. Well, assets placed
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into your revocable trust also get a
step up in basis when they're distributed to
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your heir. So if you have
a revocable trust and you put that hundred
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thousand dollars worth of stock into let's
say an account that's in the name of
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your revocable trust, and at the
time of your death that stock goes to
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your children, your children get the
step ped up basis to the in our
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example two hundred and fifty thousand dollars, again avoiding the capital gains. But
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under until just recently, that was
the way the IRS also treated irrevocable trust.
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Again, irrevocable trust not the normal
estate planning tool, but an irrevocable
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trust again is one that you can't
change and normally you can't be in charge
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of. Well. Under new IRS
rules, assets in an irrevocable trust do
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not get a step up in basis
when they are distributed. So if you
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take that same hundred thousand dollars of
stock, you put it into an irrevocable
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trust, and at your death the
stock is now going to go to your
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children as a distribution from the irrevocable
trust. There is not going to be
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a step up basis, which means
your children when they sell it for the
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two hundred and fifty thousand dollars,
are going to pay the capital gains tax
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on that one hundred and fifty thousand
dollars gain. Essentially, what the IRS
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is saying is that in order to
get a step up in basis, an
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asset must be included in the taxable
estate of the grand tour at the time
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of death. Again, to get
a step up in basis, assets must
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be included in the taxable estate at
the time of the grand tour's death.
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So if you have an irrevocable trust
as part of your estate plan, make
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sure that you review it, make
sure that you look at what it owns
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in the basis and any of those
assets happen to be in there, to
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make sure it complies with the updated
IRIS rules, and do whatever you need
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to do if it's important to preserve
the step up basis in those assets when
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they pass to your errors. Now, why do people have irrevocable trust Well,
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two primary reasons that folks are going
to look at having an irrevocable trust.
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One is it's pretty common as oftentimes
as part of medicaid planning that is
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done today, certain assets might be
placed into an irrevocable trust as part of
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a medicaid plan. Again, if
that's been done, you need to review
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the assets and the trust to see
do you need to change anything in light
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of the new IRIS rules denying step
up in basis. And the second reason
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that oftentimes people are going to have
an irrevocable trust is perhaps having what Michigan
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might call a domestic asset protection trust. It's normally used to protect assets from
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creditors. So you have an estate, you want to set up summer,
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all of that into this irrevocable trust, perhaps a domestic asset protection trust,
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so that creditors can't come after those
assets if you were to get sued by
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somebody. Perhaps you're a professional and
you're concerned that you're going to be sued
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and you're trying to protect assets from
being subject to the claims in that lawsuit.
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And another common use of the asset
protection trust now is in the area
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of divorce. You're looking at getting
married, you're placing assets into a domestic
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asset protection trust so that if the
marriage fails, those assets won't be subject
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to claims by your spouse in the
event of a divorce. So there are
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reasons that people will use these irrevocable
trust and it's simply making sure that if
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you're going to now have an irrevocable
trust, or if you already have an
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irrevocable trust, that you are mindful
that when what is going to happen with
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those assets, if they happen to
have increased in value before they're going to
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be distributed out to your heirs.
You also have to be mindful when you
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have an area of gulf trust when
you put appreciate it assets into the irrevocable
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trust, when you put them in
the irrevocable trust. So let's say you've
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got that one hundred thousand dollars worth
of stock, you put it into the
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irrevocable or to the yes, irrevocable
trust, that is essentially going to be
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treated like a gift to another person
because the trust is treated as a separate
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taxable entity, which means you're going
to be passing on your basis in the
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assets to the trust. So that
if the trust then turns around and sells
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the asset, the trust is going
to be paying the capital gains tax when
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it is sold. So again,
be clear, we're not talking about the
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everyday, normal revocable living trust that
people have. We are talking about irrevocable
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trust. Now, I suppose there
could be a situation in which somebody had
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a revocable trust, but they died, and now it becomes irrevocable upon death,
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and for some asks, for some
reason, some assets now get transferred
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into that irrevocable trust. After your
death, you also have to look at
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those assets because in that case,
those assets, okay, depending upon whether
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or not they were included in your
estate at the time of your death.
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Okay, if they were, the
IRSI says, there will still be a
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step up in basis when they go
to your errors. But if they were
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not included or able to be included
in the taxable estate at the time of
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your death, then again there would
not be a stepped up basis in those
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assets. The bottom line of this
previous discussion really is that you should make
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sure if you're dealing with irrevocable trust
that you have an understanding with your attorneys
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and your tax advisors how step up
basis is going to be impacted, and
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of course I mean den I would
be happy to discuss that with you as
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part of your estate plan. We
would be happy to work with your tax
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advisor to make sure that if there
are any changes that should be done relative
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to those assets and that irrevocable trust, that those things are taking care of.
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Of course, we would also even
if that's not a consideration for you,
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we would be honored to have the
opportunity to help you protect your loved
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ones by either putting together your estate
plan, perhaps amending a plan that you
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already have, or assisting you in
settling a loved ones estate. Simply go
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to our law firm website, which
you will find at DOYLAWPC dot com.
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There you're going to find information on
how to schedule an in person consultation at
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the East Lansing Office, how to
schedule virtual consultations via Zoom or telephone,
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And of course, if you're looking
simply for an individual document, the most
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common one you might need a new
certificate of trust to sell real estate that's
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owned by a trust, check out
our legal store that's also available at doial
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Law PC. You might be able
to order that online through the office without
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needing a consultation in order to accomplish
that. Again, that is all available
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at doil Law PC. Well,
I think that's going to be it for
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today's show though. As always,
if you have a comment about the program,
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a topic that you'd like to have
me discuss, questions that you'd like
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to have answered in many of the
topics that I covered during the program,
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I've are as a result of people
asking me questions or saying, hey,
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Tom, can you talk about this
particular issue? Please send me an email
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to Tuesday to Tom. I'm sorry
at Tuesday with Tom. Please of course
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00:16:07.399 --> 00:16:10.559
follow us on Facebook, invite your
family and friends to follow us. That
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would be Tuesday with Tom as well
as Doyle Law PC. Remember too.
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Tuesday with Tom is available on Apple
Podcasts, Spotify, Google podcast, iHeartRadio,
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Spreaker, probably any other service that
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speaker as well to play Tuesday with
Tom. Thanks again for spending some of
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your time with us today. As
always, I hope that you have an
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awesome day and an awesome week In
Michigan. Stay Safe Tuesday with Tom has
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00:16:57.799 --> 00:17:03.519
been brought to you by the State
Planning attorneys at Doyle Law PC. To
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learn how we can help you with
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ones estate, please call us today
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three six six. That's five one
seven, three two three seven three six six
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Well, good afternoon, Michiganders.
It's Tuesday, August eighth, twenty twenty
2
00:00:36.520 --> 00:00:41.479
three, and of course this is
Tuesday with Tom, Michigan's only weekly podcast
3
00:00:42.000 --> 00:00:46.759
where we answered your questions about a
state planning and a state settlement in Michigan.
4
00:00:47.640 --> 00:00:51.079
As always, I'm your host,
Tom Doyle, a state planning attorney,
5
00:00:51.119 --> 00:00:56.439
lifelong Michigan resident, and an ambassador
for all things good in this great
6
00:00:56.920 --> 00:01:04.760
state of Michigan. Welcome, Welcome, Welcome to today's program, August August
7
00:01:04.840 --> 00:01:11.200
eight. Some of you might have
kids going back to school already. Last
8
00:01:11.239 --> 00:01:15.000
week's episode, I talked about two
documents that every college student should have,
9
00:01:15.239 --> 00:01:19.920
So if you have a child or
grandchild heading off to college, I encourage
10
00:01:19.959 --> 00:01:23.640
you to listen to last week's episode
to make sure that they have their legal
11
00:01:25.480 --> 00:01:36.159
documents that they need to have before
they head off today's show. The IRS
12
00:01:36.200 --> 00:01:42.400
eliminates step up basis for some assets. But please remember what I'm about to
13
00:01:42.439 --> 00:01:49.040
discuss is, as always, for
educational purposes only. It is not intended
14
00:01:49.120 --> 00:01:53.439
to be legal advice. You need
to work with your attorney to determine what
15
00:01:53.560 --> 00:02:09.680
is appropriate for you and your estate
plan. All right, the IRS has
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00:02:09.719 --> 00:02:20.120
eliminated according to recent rules. Step
up basis step up in basis for some
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00:02:20.240 --> 00:02:23.520
assets. So let's just start with
what is step up in basis. Well,
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when someone inherits an asset with what
would be considered an unrealized gain,
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that means that the asset has increased
in value over the time that the deceased
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person owned it, the basis steps
up or resets to the current fair market
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value on the date of death of
the deceased, essentially wiping out any tax
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liability for unrealized capital gains. So
choose an example. Let's say that you
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purchase stock for one hundred thousand dollars
more than a year ago. It's gone
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up in value, and let's say
it's now worth two hundred and fifty thousand
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dollars. Well, if you sold
the stock today for two hundred fifty thousand
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dollars, you would have an gain
on that stock of one hundred and fifty
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thousand. You bought it for one
hundred that would be what we call your
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basis. Now in the stock you
sold it for two hundred and fifty the
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difference in that is one hundred and
fifty thousand dollars of profit, and you
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would pay a capital gains tax on
that one hundred and fifty thousand dollars.
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Now, if you left that stock
to your air so you still own it,
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you die in your airs are now
going to receive that stock at the
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time of your death. Their basis
steps up to what it is worth on
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the date of your death. So
in this example, let's say you bought
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it for one hundred thousand dollars,
your heirs receive it, and on the
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date of your death it's worth two
hundred and fifty thousand dollars. Their basis
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in the stock steps up to that
two hundred and fifty thousand dollars, which
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means if they turn around and sold
it for two hundred fifty thousand dollars,
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there would be no capital gains tax
paid. Now let's contrast that briefly too.
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Let's say during your lifetime you purchase
one hundred thousand worth of stock,
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you gave it to your heirs during
your lifetime, or maybe at your house,
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and you gave your house to your
heirs during your lifetime. By doing
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that, you are passing on your
basis to your heirs. So in that
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example, you bought the stock for
one hundred thousand, you gave it to
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your heirs during your lifetime. Their
basis is now one hundred thousand dollars.
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They sell it for the two hundred
and fifty thousand they are paying the capital
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gains tax. Or let's say it's
your house. You bought a house for
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one hundred thousand dollars, you give
it to a child during your lifetime.
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The child turns around and sells that
house after your death for two hundred and
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fifty thousand dollars. Your child is
now paying the capital gains. So essentially,
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what happens when you make gifts of
appreciated assets during your lifetime, you
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are passing on the capital gains to
your heirs, which is why in previous
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episodes of my program and during seminars
if you've ever attended one, I've generally
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indicated that it is normally, normally
again better for your heirs to re see
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I've appreciated assets at your death rather
than during your lifetime. But let's get
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back to stepped up basis and what
the IRIS has recently done. Let's say
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that you have a revocable trust as
part of your estate plan, which is
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the normal trust that is prepared as
part of a regular estate plan, again
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revocable meaning you can get rid of
it, you can change it, you
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can amend it, you're still in
charge of it. Well, assets placed
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into your revocable trust also get a
step up in basis when they're distributed to
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your heir. So if you have
a revocable trust and you put that hundred
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thousand dollars worth of stock into let's
say an account that's in the name of
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your revocable trust, and at the
time of your death that stock goes to
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your children, your children get the
step ped up basis to the in our
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example two hundred and fifty thousand dollars, again avoiding the capital gains. But
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under until just recently, that was
the way the IRS also treated irrevocable trust.
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Again, irrevocable trust not the normal
estate planning tool, but an irrevocable
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trust again is one that you can't
change and normally you can't be in charge
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of. Well. Under new IRS
rules, assets in an irrevocable trust do
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not get a step up in basis
when they are distributed. So if you
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take that same hundred thousand dollars of
stock, you put it into an irrevocable
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trust, and at your death the
stock is now going to go to your
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children as a distribution from the irrevocable
trust. There is not going to be
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a step up basis, which means
your children when they sell it for the
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two hundred and fifty thousand dollars,
are going to pay the capital gains tax
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on that one hundred and fifty thousand
dollars gain. Essentially, what the IRS
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is saying is that in order to
get a step up in basis, an
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asset must be included in the taxable
estate of the grand tour at the time
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of death. Again, to get
a step up in basis, assets must
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be included in the taxable estate at
the time of the grand tour's death.
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So if you have an irrevocable trust
as part of your estate plan, make
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sure that you review it, make
sure that you look at what it owns
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in the basis and any of those
assets happen to be in there, to
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make sure it complies with the updated
IRIS rules, and do whatever you need
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to do if it's important to preserve
the step up basis in those assets when
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they pass to your errors. Now, why do people have irrevocable trust Well,
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two primary reasons that folks are going
to look at having an irrevocable trust.
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One is it's pretty common as oftentimes
as part of medicaid planning that is
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done today, certain assets might be
placed into an irrevocable trust as part of
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a medicaid plan. Again, if
that's been done, you need to review
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the assets and the trust to see
do you need to change anything in light
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of the new IRIS rules denying step
up in basis. And the second reason
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that oftentimes people are going to have
an irrevocable trust is perhaps having what Michigan
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might call a domestic asset protection trust. It's normally used to protect assets from
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00:10:01.600 --> 00:10:05.039
creditors. So you have an estate, you want to set up summer,
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00:10:05.159 --> 00:10:11.799
all of that into this irrevocable trust, perhaps a domestic asset protection trust,
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00:10:11.200 --> 00:10:16.960
so that creditors can't come after those
assets if you were to get sued by
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00:10:18.000 --> 00:10:24.480
somebody. Perhaps you're a professional and
you're concerned that you're going to be sued
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and you're trying to protect assets from
being subject to the claims in that lawsuit.
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And another common use of the asset
protection trust now is in the area
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00:10:33.240 --> 00:10:37.080
of divorce. You're looking at getting
married, you're placing assets into a domestic
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00:10:37.120 --> 00:10:46.519
asset protection trust so that if the
marriage fails, those assets won't be subject
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to claims by your spouse in the
event of a divorce. So there are
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reasons that people will use these irrevocable
trust and it's simply making sure that if
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00:11:00.600 --> 00:11:05.120
you're going to now have an irrevocable
trust, or if you already have an
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00:11:05.120 --> 00:11:13.720
irrevocable trust, that you are mindful
that when what is going to happen with
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those assets, if they happen to
have increased in value before they're going to
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be distributed out to your heirs.
You also have to be mindful when you
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have an area of gulf trust when
you put appreciate it assets into the irrevocable
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00:11:31.799 --> 00:11:35.840
trust, when you put them in
the irrevocable trust. So let's say you've
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00:11:35.879 --> 00:11:39.960
got that one hundred thousand dollars worth
of stock, you put it into the
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00:11:39.159 --> 00:11:45.600
irrevocable or to the yes, irrevocable
trust, that is essentially going to be
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00:11:45.639 --> 00:11:52.159
treated like a gift to another person
because the trust is treated as a separate
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00:11:52.679 --> 00:11:58.320
taxable entity, which means you're going
to be passing on your basis in the
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00:11:58.399 --> 00:12:03.159
assets to the trust. So that
if the trust then turns around and sells
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00:12:03.200 --> 00:12:07.200
the asset, the trust is going
to be paying the capital gains tax when
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00:12:07.440 --> 00:12:11.679
it is sold. So again,
be clear, we're not talking about the
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everyday, normal revocable living trust that
people have. We are talking about irrevocable
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00:12:18.639 --> 00:12:24.480
trust. Now, I suppose there
could be a situation in which somebody had
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00:12:24.559 --> 00:12:31.279
a revocable trust, but they died, and now it becomes irrevocable upon death,
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and for some asks, for some
reason, some assets now get transferred
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00:12:35.960 --> 00:12:41.320
into that irrevocable trust. After your
death, you also have to look at
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those assets because in that case,
those assets, okay, depending upon whether
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or not they were included in your
estate at the time of your death.
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00:12:52.879 --> 00:12:58.399
Okay, if they were, the
IRSI says, there will still be a
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step up in basis when they go
to your errors. But if they were
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00:13:01.320 --> 00:13:05.840
not included or able to be included
in the taxable estate at the time of
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00:13:05.919 --> 00:13:11.600
your death, then again there would
not be a stepped up basis in those
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00:13:11.960 --> 00:13:37.559
assets. The bottom line of this
previous discussion really is that you should make
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sure if you're dealing with irrevocable trust
that you have an understanding with your attorneys
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00:13:45.559 --> 00:13:52.840
and your tax advisors how step up
basis is going to be impacted, and
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00:13:52.960 --> 00:13:56.879
of course I mean den I would
be happy to discuss that with you as
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00:13:56.960 --> 00:14:01.000
part of your estate plan. We
would be happy to work with your tax
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00:14:01.039 --> 00:14:05.799
advisor to make sure that if there
are any changes that should be done relative
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00:14:05.879 --> 00:14:09.240
to those assets and that irrevocable trust, that those things are taking care of.
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00:14:09.960 --> 00:14:13.759
Of course, we would also even
if that's not a consideration for you,
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00:14:13.879 --> 00:14:18.159
we would be honored to have the
opportunity to help you protect your loved
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00:14:18.200 --> 00:14:24.159
ones by either putting together your estate
plan, perhaps amending a plan that you
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00:14:24.279 --> 00:14:31.039
already have, or assisting you in
settling a loved ones estate. Simply go
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00:14:31.559 --> 00:14:37.039
to our law firm website, which
you will find at DOYLAWPC dot com.
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00:14:37.080 --> 00:14:41.039
There you're going to find information on
how to schedule an in person consultation at
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00:14:41.039 --> 00:14:46.840
the East Lansing Office, how to
schedule virtual consultations via Zoom or telephone,
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00:14:48.080 --> 00:14:52.000
And of course, if you're looking
simply for an individual document, the most
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00:14:52.039 --> 00:14:56.559
common one you might need a new
certificate of trust to sell real estate that's
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00:14:56.600 --> 00:15:01.559
owned by a trust, check out
our legal store that's also available at doial
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00:15:01.600 --> 00:15:05.480
Law PC. You might be able
to order that online through the office without
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00:15:05.799 --> 00:15:13.279
needing a consultation in order to accomplish
that. Again, that is all available
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00:15:13.679 --> 00:15:31.960
at doil Law PC. Well,
I think that's going to be it for
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00:15:31.039 --> 00:15:37.799
today's show though. As always,
if you have a comment about the program,
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00:15:37.840 --> 00:15:43.000
a topic that you'd like to have
me discuss, questions that you'd like
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00:15:43.120 --> 00:15:46.879
to have answered in many of the
topics that I covered during the program,
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00:15:46.960 --> 00:15:52.240
I've are as a result of people
asking me questions or saying, hey,
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00:15:52.279 --> 00:15:58.600
Tom, can you talk about this
particular issue? Please send me an email
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00:15:58.240 --> 00:16:07.320
to Tuesday to Tom. I'm sorry
at Tuesday with Tom. Please of course
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00:16:07.399 --> 00:16:10.559
follow us on Facebook, invite your
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as Doyle Law PC. Remember too.
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Tuesday with Tom is available on Apple
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Spreaker, probably any other service that
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speaker as well to play Tuesday with
Tom. Thanks again for spending some of
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00:16:42.240 --> 00:16:47.240
your time with us today. As
always, I hope that you have an
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00:16:47.279 --> 00:16:57.799
awesome day and an awesome week In
Michigan. Stay Safe Tuesday with Tom has
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been brought to you by the State
Planning attorneys at Doyle Law PC. To
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learn how we can help you with
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ones estate, please call us today
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