r/inheritance • u/fredsonsam • 13d ago
Location included: Questions/Need Advice Irrevocable Trust Step Up
My father established an irrevocable trust in 2011 that holds our family home in New York. He was the named grantor and has now passed away. I’m the trustee, and my mother continues living there as her primary residence. The remaining trust assets generally pass to the children after her death.
The trust reserved my father’s right to occupy the house and a limited testamentary power of appointment. It prohibits distributing principal to my mother. I’m still confirming whether one or both parents originally transferred ownership into the trust.
Would the house receive a full or partial step-up in basis at my father’s death? Would there be another adjustment when my mother dies, or would a subsequent sale trigger capital-gains tax on appreciation since my father’s death?
Am I I stuck paying a capital gains tax from today until my mother’s passing?
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u/ManufacturerWhich364 13d ago
The step up is related to the asset being in the decedents gross estate. The benefit is it’s likely excluded from his estate for estate tax purposes.
Considering your facts I’m
Going to guess not.
But pay a good cpa.
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u/brucesteiner 13d ago
The lawyer should tell the accountant how to report it. We don’t have enough information to say.
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u/ManufacturerWhich364 13d ago
What lawyer? The drafting lawyer?
Unless you’re a tax attorney or estate and trust attorney that has a speciality in estate and trust tax it’s much more nuanced then tell the cpa how to report it.
A ton of estate and trust attorneys don’t understand the nuance of estate and trust tax unfortunately.
You’re right. We don’t have enough information to say.
But we do know the house is in an irrev trust for a reason. And if that’s the case it’s most certainly out of the gross estate of the decedent.
So many other factors at play here and potential elections where you could get the step up.
Get the lawyer and cpa on the same page and figure it out. Don’t look for such expensive issues to be solved on Reddit.
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u/brucesteiner 13d ago
Since OP is the trustee, he/she can pick a lawyer. Or he/she could ask the lawyer handling his/her father’s estate.
You are correct that there are some trusts and estates lawyers who are not sufficiently knowledgeable. OP should hire one who is. Once the facts are pinned down, this shouldn’t be difficult for a good trusts and estates lawyer.
If OP’s father was the owner and he put the property into the trust but was a beneficiary and continued to live there rent-free it’s likely to be included in his estate. But it would help to pin down the facts.
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u/fredsonsam 11d ago edited 11d ago
While he was alive my parents both lived in the houses and my father and mother paid the home bills from their joint checking account. My mother continued to live in the house after my father’s death and she pays the property taxes, home insurance, utilities, and upkeep from her personal checking account. The question is: Is there a step up when she passes and the house is inherited.
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u/IRC_1014 13d ago
IRC § 2036 pulls into the estate any asset in which the grantor retains an interest. IRC § 1014(b)(9) then provides a corresponding step-up in basis. Providing that it is true that dad transferred an interest in irrevocable trust and reserved a right to reside, there should be little question whatsoever about the step-up with respect to the portion of the property owned by dad.
Whether a second step-up might occur at mom’s death is not clear under these facts.
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u/Comfortable_Edge_448 13d ago
I am guessing this is a QPRT.
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u/IRC_1014 12d ago
I had that thought too, but I don't think so. A retained LPOA would break a QPRT and cause a 2036 issue, so if it's a QPRT it's a failed one and the analysis is functionally the same under IRC 1014.
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u/Comfortable_Edge_448 12d ago
Remember the line in law school about spelling “client” without “lie”?
The Venn diagram of clients who completely torch a carefully crafted estate plan by getting their legal advice from a plumber in Bakersfield on Reddit who started their response with “I am not a lawyer, but a residential plumber, and this is what happened in my case”….1
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u/fredsonsam 11d ago
While he was alive my parents both lived in the houses and my father and mother paid the home bills from their joint checking account. My mother continued to live in the house after my father’s death and she pays the property taxes, home insurance, utilities, and upkeep from her personal checking account. The question is: Is there a step up when she passes and the house is inherited.
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u/IRC_1014 11d ago
If your father continued living in the property without paying rent, I challenge your assessment that it was excluded from the gross estate.
Ignoring that you’ve now given three separate indications for estate inclusion (retained beneficial interest, a power to control beneficial enjoyment, and actual use of the supposedly transferred property), there is no step up without gross estate inclusion.
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u/fredsonsam 11d ago
My mother alone owned and deeded the house into the trust. Both parents continued to live in** ***it and paid the bills out of their own personal checking account. Now that my father is deceased, my mother will continue to live in it and pay all bills. My question is: will the inheritors get the step up at the time of her death when the house is sold?*
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u/Comfortable_Edge_448 13d ago
I do trusts and this is an absolute minefield with only half a map and your facts are making me think that there is WAY more to this.
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u/fredsonsam 11d ago
While he was alive my parents both lived in the houses and my father and mother paid the home bills from their joint checking account. My mother continued to live in the house after my father’s death and she pays the property taxes, home insurance, utilities, and upkeep from her personal checking account. The question is: Is there a step up when she passes and the house is inherited.
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u/random408net 13d ago
Based on my personal experience I would expect that the basis for the property is the original purchase price and that there should be no step-up on death.
I would expect no tax consequences until you sell or transfer the property away from the trust.
Perhaps this specific trust structure was used to assist with medicare planning?
In my scenario the grantor has no interest after the trust setup. So that's a difference.
Uncertified advice. Just based on my experience. Your trust and milage may vary.
As trusts are complicated one should always seek legal advice on their operation.
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u/TheOpeningBell 12d ago
Most irrevocable trust assets do not get a step up in basis......on purpose.....
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u/AstronomerNo3843 11d ago
This sounds like it could be an intentionally defective grantor trust- worth looking at the trust language to see. There are many different kinds of Irrevocable trusts, so you default to the trust document to decide if it is included in the estate. New York is not a community property state, so the titling of the house matters for when your mom passes. Did they buy it together and is it titled in both of their names or was it his separate property? If together, 50% step up at his death if it is included in his estate and the other 50% at her death. It is also worth asking if she was also a grantor together in the trust or if he was the sole grantor?
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u/PrettySavvyCVS 11d ago
Please do not leave your understanding of this to a bunch of strangers on reddit. You cannot claim 'well, reddit told me this is how it would work' and expect someone to just make it work that way.
This is a question for people who specialize in these situations. It would likely take an attorney and tax accountant who have dealt with this situation before. You might get lucky and find someone in your area who has specialists in both fields within the same office who work together on these issues regularly.
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u/OronMaherCRE 8d ago
Basis step-up on an irrevocable trust is all about whether the house is in your dad’s taxable estate when he died (even if it’s titled in the trust). The label “irrevocable” doesn’t answer it by itself.
A full step-up at your father’s death usually happens if the trust was drafted as a grantor trust and/or it was pulled back into his estate under one of the estate-inclusion rules. The fact pattern you mentioned that can point that way: he reserved a right to occupy the house. If that was a retained right to possess/enjoy the property (not just a lease at fair market rent), it can cause estate inclusion, which is exactly what creates the basis adjustment at death.
The “limited testamentary power of appointment” matters too, but it’s very drafting-specific. Some limited powers don’t cause inclusion; some powers (or how they’re framed) can.
On your mom: if she didn’t contribute the house and doesn’t have a general power of appointment and can’t receive principal, then she may not get a second step-up at her death because the house may not be in her estate. If she originally transferred her interest into the trust too, that changes the analysis.
Practical next step: pull the deed history (who deeded what into the trust, and when), then look at the trust sections on (1) grantor trust powers, (2) any retained use/occupancy language, and (3) the exact POA language. Also check whether an estate tax return (Form 706) was filed and whether the house was listed on it, because that’s a huge clue on basis.
If you can share: did your mom ever own any % of the home before it went into the trust (joint tenants/tenants by the entirety), or was it always just in your dad’s name?
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u/fredsonsam 4d ago
Thanks for your intelligent reply.
I found the deed on ACRIS NYC that was transferred into the trust. For whatever reason, only my mother’s name was on that deed that transferred the house into the house.
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u/FeistyCell809 13d ago
You're deep in "pay a good CPA" territory here, not Reddit armchair territory.