Question:

If my mother transfers real estate into 3 separate nominee trusts and her irrevocable trust is the 100% beneficiary of each, does the transfer result in a capital gains tax and a step-up in basis to her beneficiaries? As donor of the irrevocable Trust, if she reserves a limited power of appointment exercisable during her lifetime by written instrument to the trustee to appoint the remaining principal and any undistributed income of the trust to members of the class consisting of her children or grandchildren or to charitable organizations, will this cause the property contained in the trust to be included in her estate for tax purposes? Do her beneficiaries of the trust receive a step-up in basis when they receive the property?

Response:

It sounds like your mother has three separate pieces of property, but that does not mean she needs three separate nominee realty trusts. In fact, given that a single trust will be the beneficiary of all the property, it’s not clear why nominee realty trusts are needed at all. She could simply transfer all three properties directly to the irrevocable trust. But that wasn’t your question.

Whether a transfer to an irrevocable trust is considered a completed gift for tax purposes, thus removing the property transferred from the grantor’s estate, or is an incomplete gift with the transferred property remaining in the grantor’s estate, depends on the terms of the trust. Retaining certain powers can keep the property in the grantor’s taxable estate. Among these, as you suggest, is lifetime power of appointment. A testamentary power of appointment that takes effect at death also does the trick.

Whether the property remains in the grantor’s taxable estate is linked directly to whether the property receives a step-up in basis upon the grantor’s death. If it’s in the estate, it gets a step-up. If it’s not in the grantor’s estate, it does not. In the latter case, the beneficiaries receive the property with a “carry over” basis — the same basis as the grantor had before transferring the property into trust. In your case, the power of appointment language you cite would keep the property in your mother’s taxable estate and it therefore would receive a step-up in basis upon her death.

There’s always something of a tradeoff between estate taxes and capital gains taxes. Keeping the property in your mother’s taxable estate will make it subject to estate taxes. On the federal level, this is probably not an issue since the threshold for taxation in 2025 is $14 million. But if your mother lives in Massachusetts, where nominee trusts are commonly used, the threshold is $2 million. Given the high price of real estate in the commonwealth, the total value of three properties could easily exceed this level.

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