IRS Eliminates Step-Up In Basis For Some Assets (Episode #285)

0:30 Well, good afternoon, Michiganders. It's Tuesday, August eighth, twenty twenty three, and of course this is Tuesday with Tom, Michigan's only weekly podcast where we answered your questions about a state planning and a state settlement in Michigan. As always, I'm your host, Tom Doyle, a state planning attorney, lifelong Michigan resident, and an ambassador for all things good in this great state of Michigan. Welcome, Welcome, Welcome to today's program, August August eight. Some of you might have kids going back to school already. Last week's episode, I talked about two documents that every college student should have, So if you have a child or grandchild heading off to college, I encourage you to listen to last week's episode to make sure that they have their legal documents that they need to have before they head off today's show. The IRS eliminates step up basis for some assets. But please remember what I'm about to discuss is, as always, for educational purposes only. It is not intended to be legal advice. You need to work with your attorney to determine what is appropriate for you and your estate plan. All right, the IRS has

2:09 eliminated according to recent rules. Step up basis step up in basis for some assets. So let's just start with what is step up in basis. Well, when someone inherits an asset with what would be considered an unrealized gain, that means that the asset has increased in value over the time that the deceased person owned it, the basis steps up or resets to the current fair market value on the date of death of the deceased, essentially wiping out any tax liability for unrealized capital gains. So choose an example. Let's say that you purchase stock for one hundred thousand dollars more than a year ago. It's gone up in value, and let's say it's now worth two hundred and fifty thousand dollars. Well, if you sold the stock today for two hundred fifty thousand dollars, you would have an gain on that stock of one hundred and fifty thousand. You bought it for one hundred that would be what we call your basis. Now in the stock you sold it for two hundred and fifty the difference in that is one hundred and fifty thousand dollars of profit, and you would pay a capital gains tax on that one hundred and fifty thousand dollars.

3:46 Now, if you left that stock to your air so you still own it, you die in your airs are now going to receive that stock at the time of your death. Their basis steps up to what it is worth on the date of your death. So in this example, let's say you bought it for one hundred thousand dollars, your heirs receive it, and on the date of your death it's worth two hundred and fifty thousand dollars. Their basis in the stock steps up to that two hundred and fifty thousand dollars, which means if they turn around and sold it for two hundred fifty thousand dollars, there would be no capital gains tax paid. Now let's contrast that briefly too.

4:34 Let's say during your lifetime you purchase one hundred thousand worth of stock, you gave it to your heirs during your lifetime, or maybe at your house, and you gave your house to your heirs during your lifetime. By doing that, you are passing on your basis to your heirs. So in that example, you bought the stock for one hundred thousand, you gave it to your heirs during your lifetime. Their basis is now one hundred thousand dollars. They sell it for the two hundred and fifty thousand they are paying the capital gains tax. Or let's say it's your house. You bought a house for one hundred thousand dollars, you give it to a child during your lifetime.

5:21 The child turns around and sells that house after your death for two hundred and fifty thousand dollars. Your child is now paying the capital gains. So essentially, what happens when you make gifts of appreciated assets during your lifetime, you are passing on the capital gains to your heirs, which is why in previous episodes of my program and during seminars if you've ever attended one, I've generally indicated that it is normally, normally again better for your heirs to re see I've appreciated assets at your death rather than during your lifetime. But let's get back to stepped up basis and what the IRIS has recently done. Let's say that you have a revocable trust as part of your estate plan, which is the normal trust that is prepared as part of a regular estate plan, again revocable meaning you can get rid of it, you can change it, you can amend it, you're still in charge of it. Well, assets placed into your revocable trust also get a step up in basis when they're distributed to your heir. So if you have a revocable trust and you put that hundred thousand dollars worth of stock into let's say an account that's in the name of your revocable trust, and at the time of your death that stock goes to

6:56 your children, your children get the step ped up basis to the in our example two hundred and fifty thousand dollars, again avoiding the capital gains. But under until just recently, that was the way the IRS also treated irrevocable trust. Again, irrevocable trust not the normal estate planning tool, but an irrevocable trust again is one that you can't change and normally you can't be in charge of. Well. Under new IRS rules, assets in an irrevocable trust do not get a step up in basis when they are distributed. So if you take that same hundred thousand dollars of stock, you put it into an irrevocable trust, and at your death the stock is now going to go to your children as a distribution from the irrevocable trust. There is not going to be a step up basis, which means your children when they sell it for the two hundred and fifty thousand dollars, are going to pay the capital gains tax on that one hundred and fifty thousand dollars gain. Essentially, what the IRS is saying is that in order to get a step up in basis, an asset must be included in the taxable estate of the grand tour at the time

8:26 of death. Again, to get a step up in basis, assets must be included in the taxable estate at the time of the grand tour's death. So if you have an irrevocable trust as part of your estate plan, make sure that you review it, make sure that you look at what it owns in the basis and any of those assets happen to be in there, to make sure it complies with the updated IRIS rules, and do whatever you need to do if it's important to preserve the step up basis in those assets when they pass to your errors. Now, why do people have irrevocable trust Well, two primary reasons that folks are going to look at having an irrevocable trust.

9:16 One is it's pretty common as oftentimes as part of medicaid planning that is done today, certain assets might be placed into an irrevocable trust as part of a medicaid plan. Again, if that's been done, you need to review the assets and the trust to see do you need to change anything in light of the new IRIS rules denying step up in basis. And the second reason that oftentimes people are going to have an irrevocable trust is perhaps having what Michigan might call a domestic asset protection trust. It's normally used to protect assets from creditors. So you have an estate, you want to set up summer, all of that into this irrevocable trust, perhaps a domestic asset protection trust, so that creditors can't come after those assets if you were to get sued by somebody. Perhaps you're a professional and you're concerned that you're going to be sued and you're trying to protect assets from being subject to the claims in that lawsuit.

10:28 And another common use of the asset protection trust now is in the area of divorce. You're looking at getting married, you're placing assets into a domestic asset protection trust so that if the marriage fails, those assets won't be subject to claims by your spouse in the event of a divorce. So there are reasons that people will use these irrevocable trust and it's simply making sure that if you're going to now have an irrevocable trust, or if you already have an irrevocable trust, that you are mindful that when what is going to happen with those assets, if they happen to have increased in value before they're going to be distributed out to your heirs. You also have to be mindful when you have an area of gulf trust when you put appreciate it assets into the irrevocable trust, when you put them in the irrevocable trust. So let's say you've got that one hundred thousand dollars worth of stock, you put it into the irrevocable or to the yes, irrevocable trust, that is essentially going to be treated like a gift to another person because the trust is treated as a separate taxable entity, which means you're going to be passing on your basis in the assets to the trust. So that if the trust then turns around and sells

12:03 the asset, the trust is going to be paying the capital gains tax when it is sold. So again, be clear, we're not talking about the everyday, normal revocable living trust that people have. We are talking about irrevocable trust. Now, I suppose there could be a situation in which somebody had a revocable trust, but they died, and now it becomes irrevocable upon death, and for some asks, for some reason, some assets now get transferred into that irrevocable trust. After your death, you also have to look at those assets because in that case, those assets, okay, depending upon whether or not they were included in your estate at the time of your death.

12:52 Okay, if they were, the IRSI says, there will still be a step up in basis when they go to your errors. But if they were not included or able to be included in the taxable estate at the time of your death, then again there would not be a stepped up basis in those assets. The bottom line of this previous discussion really is that you should make sure if you're dealing with irrevocable trust that you have an understanding with your attorneys and your tax advisors how step up basis is going to be impacted, and of course I mean den I would be happy to discuss that with you as part of your estate plan. We would be happy to work with your tax advisor to make sure that if there are any changes that should be done relative to those assets and that irrevocable trust, that those things are taking care of.

14:09 Of course, we would also even if that's not a consideration for you, we would be honored to have the opportunity to help you protect your loved ones by either putting together your estate plan, perhaps amending a plan that you already have, or assisting you in settling a loved ones estate. Simply go to our law firm website, which you will find at DOYLAWPC dot com. There you're going to find information on how to schedule an in person consultation at the East Lansing Office, how to schedule virtual consultations via Zoom or telephone, And of course, if you're looking simply for an individual document, the most common one you might need a new certificate of trust to sell real estate that's owned by a trust, check out our legal store that's also available at doial Law PC. You might be able to order that online through the office without needing a consultation in order to accomplish that. Again, that is all available at doil Law PC. Well, I think that's going to be it for today's show though. As always, if you have a comment about the program, a topic that you'd like to have me discuss, questions that you'd like

15:43 to have answered in many of the topics that I covered during the program, I've are as a result of people asking me questions or saying, hey, Tom, can you talk about this particular issue? Please send me an email to Tuesday to Tom. I'm sorry at Tuesday with Tom. Please of course follow us on Facebook, invite your family and friends to follow us. That would be Tuesday with Tom as well as Doyle Law PC. Remember too. Tuesday with Tom is available on Apple Podcasts, Spotify, Google podcast, iHeartRadio, Spreaker, probably any other service that you use to listen to podcast, you will find Tuesday with Tom is there and you can always ask your smart speaker as well to play Tuesday with Tom. Thanks again for spending some of your time with us today. As always, I hope that you have an awesome day and an awesome week In Michigan. Stay Safe Tuesday with Tom has been brought to you by the State Planning attorneys at Doyle Law PC. To learn how we can help you with your estate plan or was settling a loved ones estate, please call us today at five one seven three two three seven three six six. That's five one seven, three two three seven three six six