Beware!! New IRS Rule on Trust Taxes

New IRS ruling on Irrevocable Trusts

by Andrea Rutherford, Esq.

The IRS issued a revenue ruling on Irrevocable Trusts last month – attracting some media attention by the Kiplinger Personal Finance and others.

If you have a trust drafted by Dalton & Finegold, YOU ARE OKAY!  We anticipated this and our trusts are in compliance with the new IRS ruling.  This ruling affects only Irrevocable Trusts – if you have a Bypass Trust or a Revocable Trust that becomes irrevocable when you are deceased, you aren’t affected by this.

Irrevocable Trusts are a terrific way to protect your home from long-term care expenses, such as nursing homes.  But they must be carefully drafted.  There are two ways to draft this kind of trust.

• If the trust is drafted one way, the house will be exempt from estate tax when the owners die. But the heirs will “carry over” the original owners’ purchase price for capital gains tax. If the original owners – usually parents – bought the house in 1980, then the capital gains tax when the kids sell is calculated back to the 1980 price.
• If the trust is drafted another way, estate tax will be due on the house. But when the heirs sell the house, the capital gains tax is calculated from the date the previous owner died (so-called “stepped up” basis).

When we draft Irrevocable Trusts, we help our clients to choose one or the other – the estate tax or the higher capital gains tax.  Usually, it’s a simple math calculation to decide which is best.

The new IRS ruling confirms that you have to choose – you can’t claim BOTH the estate tax exemption and the favorable capital gains treatment (and a warning to creative attorneys who are trying to draft trusts that accomplish both!).

If you are worried about your Trust, our attorneys would be happy to review it for you.  If you don’t have an Estate Plan yet, call us to schedule a free consultation.  The first consultation is always free of charge and our Attorneys are ready to assist you!