House in trust

Question:

If I place my home in an irrevocable trust with my children as beneficiaries what is the tax upon my death?

Response:

There is almost certainly no tax upon your death but a lot depends on the particular trust. It may be written so that when you transfer your home into the trust it is a completed gift for tax purposes. In that case, you are supposed to file a gift tax return at the time of the transfer, but it’s highly unlikely that you’ll owe a tax since there’s only a federal gift tax due after you’ve made $14 million in taxable gifts. (In addition, unless you’re in the bracket where you may have a taxable estate, there’s really no penalty for not filing a gift tax return.)

But your family is probably going to be better off if you write the trust so it’s funding is not a completed gift. Then the home will be included in your taxable estate when you die. But, again, there’s only a tax when your combined taxable gifts and estate assets exceed $14 million. Some states, however, have lower tax thresholds, so you should check those out.

The reason your family is likely to be better off if you use the second form of trust is that the property will receive a step-up in basis upon your death, eliminating any capital gain upon its sale. In some states if your estate is big enough there could be a state estate tax, but in most cases this is more than made up for by the capital gains tax savings. As a result, it’s almost certain that this is the form of trust your estate planner would use.

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