Planning to secure your legacy is a daunting task. We all want to make sure that our hard-earned assets—a lifetime of work and accomplishment—are properly passed down to our children or other heirs. The complicated and shifting landscape of estate planning can make it difficult to ensure that your assets are not subjected to prohibitive and oppressive taxes.
Some of our most prized assets, such as real estate, appreciate over our lifetime. Here in California, that appreciation may be hundreds of thousands, if not millions, of dollars. After real estate is inherited by heirs, those heirs often choose to sell that property. However, those selling inherited property may be subject to capital gains tax on the appreciation of the asset. Capital gains tax can be up to 20% of the appreciated value.
Fortunately, the IRS implements a “step-up in basis” for inherited assets. In general, this means that at the time that the property passes to a decedent’s heirs, it receives a new “baseline” for capital gains tax at its fair market value (what the property would have sold for, if it was sold on the day the property passed to the heir). After receiving a step-up in basis, only the appreciation since inheriting the property is subject to capital gains tax. This is only the difference between the fair market value of the asset at the time they inherited it, and the price they sold it for.
For example, John Doe’s father, David Doe, purchased Casa de Westlake 40 years ago for $200,000. David Doe named John Doe his heir, and when David Doe sadly passed in 2019, John Doe inherited Casa de Westlake, now valued at $1,200,000. John Doe chooses to sell the home in 2022 for $1,300,000. Without a step-up in basis, John Doe would be subject to capital gain tax on $1,100,000, easily hundreds of thousands of dollars in tax. With a step-up in basis, however, he would only pay capital gains on $100,000, significantly less.
Taking advantage of the step-up in basis is a great way to protect your heirs from egregious taxes. However, receiving the step-up in basis is now more difficult for families utilizing irrevocable trusts since the IRS passed Revenue Ruling 2023-2 in March 2023. Irrevocable trusts are a tool often used to help “spend-down” assets enabling people facing long-term aged-care or other expenses to qualify for Medicaid or other government-funded programs. “Spending-down” assets is a complex decision that should be discussed with a legal professional. Like most legal tools, it may not be right for everyone.
Before March 2023, assets passed to heirs through an irrevocable trust would receive a step-up basis. However, since IRS Revenue Ruling 2023-2, property held in an irrevocable trust that is not included in the taxable estate at death does not get a step-up in basis. Fortunately, with the help of a trusted legal professional, irrevocable trusts can be structured to be included in the taxable estate so that the assets held within the trust still receive a step-up in basis. This may be a valuable tool to help protect your hard-earned assets and keep your money in the family instead of your heirs paying hundreds of thousands in taxes.
Estate planning can be complex, and there are many different instruments through which assets may be held, and hopefully, protected. Helping you structure a trust is one of the many ways a lawyer experienced in tax and estate law can make sure that your legacy is protected long after you are gone. Without a professional, it can be difficult to understand exactly what will happen to your assets or maximize the inheritance you worked so hard to leave for your children. Failure to set up an estate for your heirs does not mean that you don’t have an estate plan, it simply means you are using the government’s plan.
Adept Legal Counsel, PC, is here to help. Our attorneys are prepared to help with your real estate and estate planning to help you maximize your legacy. Set up a free consultation today so that we can help create a custom plan to meet your needs and achieve your estate planning goals.
Visit AdeptCounsel.co or call 310.935.0271 to schedule a consultation today!