What are the Tax Results when Stepmother Buys Out House in Trust?
I am the Trustee of my father’s irrevocable living trust in Illinois. He was remarried and took my advice and set up a living trust and will, so he could pass certain assets on to me and my brother while also providing for his wife. My father’s half of the house they owned together is to be held in trust as long as my stepmother chooses to reside in the property. My father passed in September 2020 and I had the house appraised shortly afterwards. I have made my stepmother an offer to allow her to buy out the Trust’s interest in the house at the value it was appraised after Dad’s death, which is considerably less than is market value today due to the pandemic. (My brother and I would prefer the certainty of the funds now over the potential greater sales price later for various reasons. The highest is concern that the house is a money pit with lots of deferred maintenance and it is located in an area that is experiencing frequent serious floods.) If my stepmother buys out our interest at the appraisal price for date of death, I assume we’ll not have to worry about any capital gains taxes or any taxes at all correct (estate was under $300,000)? Is there anything else I should be thinking about if we move forward with the transaction?
It’s great that your father did the appropriate planning. You’re right; if your stepmother buys out your share at the date-of-death value there will be no capital gains to tax or any other tax. There will be no capital gain because the property received a “step-up” in basis to the date-of-death value upon your father’s death. (You refer to the trust as an “irrevocable living” trust. Usually, a “living” trust is the same as a “revocable” trust, but you rightly refer to the trust as “irrevocable” because upon your father’s death it became “irrevocable.” If instead, it was irrevocable during your father’s life, that might change the tax results depending on the terms of the trust.)
Technically, it will be a sale by the trust of your father’s share of the house and then a distribution of the proceeds to you and your brother. I hope your stepmother goes through with the plan. It sounds like it could significantly simplify your lives.