My parents own two houses — a winter house in Florida and their primary residence in a northern state.
The Florida house is owned by my father’s trust and the primary residence owned by my mother’s trust. In all likelihood, my mother will die first and the Florida house will be sold immediately.
My thought was to reverse the ownership (put the Florida house in my mother’s trust and primary in my father’s) so that my surviving father could get a step up in basis on the Florida house upon my mother’s death and reduce the taxes on the sale.
Does this make logical sense or am I missing something?
It is interesting that your parents have their homes inside a trust and that each of them has a different trust. We’re guessing that your parents’ estate is rather large (perhaps the total worth is in excess of $10 million) and the estate attorney thought that this would be a good way to separate assets. Or perhaps these trusts were set up years ago when the amount that could be passed down tax-free was just $1 million.
The first question is what kind of trust do your parents have? There are two basic types of trusts, revocable and irrevocable. Revocable trusts, also known as living trusts, allow the owners to retain control of the assets until they die. You can put them into the trust and then take them out.
Irrevocable trusts transfer the assets out of the owner’s control and, therefore, out of the estate for tax purposes. This also means that any income generated by the trust is excluded from your estate and your regular, ongoing income.
Estate planners and estate attorneys create trusts to help plan estates. Both types of trusts will allow assets to pass down to the heirs without going through probate, which is useful for real estate and other assets. But there are a bunch of other trusts that have specific uses, such as generation-skipping trusts, which allow assets to bypass a generation or two and be distributed to your grandchildren or great-grandchildren without incurring taxes on the death of your children, and charitable remainder trusts, which allow the owner to receive a stream of income until death, at which point in time all of the assets transfer to a charity.
So, the first questions for you are what type of trusts do your parents have, and can the assets be switched?
Without giving you and our other readers a too-detailed lesson in estate planning, there is a wide variety of trusts that might make switching difficult. If the assets are in revocable trusts, switching could be relatively easy, because your parents would simply retitle their assets into the other’s trust. But without knowing the details of when the properties were put in these trusts and other information about the assets’ values at that time, you have to go back to the estate planning attorney that assisted your parents or one who can help you now go over the assets, new rules and what your intent will be.
The next question is what benefit, if any, will you gain by doing this?
Assuming that your parents have named each other as beneficiaries in the trust, they may receive the property with the stepped-up basis — the new “cost” allowed by the IRS using the fair-market value of the property today. For the primary residence, your father (if he is still a co-owner of the house) may receive the stepped-up basis for your mother’s share of the property.
Regardless, he has a period of time during which he would be entitled to sell the property and keep up to $500,000 in profits tax-free. If he keeps the house longer than that, the stepped-up basis might be useful.
With the second home, your mother would own it entirely once your father dies and would receive his share at the stepped-up basis. But unless it is a primary residence, there could be capital gains tax to pay once it is sold.
We can understand why, if you think your mom will die first, that you’d want the Florida property to be in her name, but it may not matter. The stepped-up basis may flow to whomever is named in the trust as beneficiary. If you’re named, then you would inherit the property at the current market value, and when you sell, you’d owe nothing in tax.
Your father would inherit your mom’s half at the current market value and may owe some tax — or not — depending on the current valuation but also on how much work your parents have put into the property over the years.
Please talk to your parents about what their intentions are and then consult with a real estate or their estate attorney about the best way to move forward. You have many moving parts here, and your decision may need to be based on information and actions that your parents took many years ago.
Ilyce Glink is the creator of an 18-part webinar+ebook series called “The Intentional Investor: How to be Wildly Successful in Real Estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.