House, revocable trust tax question

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startabatha
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House, revocable trust tax question

Post by startabatha »

I am beginning to do some estate planning in my head and before I jump in with both feet need to hash some things out.

I am planning on having a revocable living trust drawn up and putting my house in it. I also am going to have a third party supplemental needs trust drawn up for my disabled adult child. When I die, the house will then be received into the special needs trust (the beneficiary of the house). I probably would want the trustee to sell the house within two years of my death as it will be too large for my son. I will be working with an estate planning attorney but want to get my thoughts solidified before going any further.

My question is how will capital gains taxes on the house be calculated in different scenarios after my death?

Potential scenarios after my death:

1. House flows from the revocable living trust to the special needs trust and is not sold for a number of years. Is there a tax on the transfer from the revocable living trust to the special needs trust?
2. House is liquidated by my Trustee, the proceeds then go to the special needs trust, where they are used to support a rental situation for my disabled adult child.
3. House is liquidated by my Trustee, the proceeds then go to the special needs trust, where they are used to buy another smaller home for my disabled adult child.

Can anyone with trust and tax expertise weigh in on my options and what would be best tax wise?

Caveat: The above scenarios are worst case scenarios if I die before I retire in ten years and sell the house on my own. My best case scenario is that I will sell my house in ax 10 years and use the proceeds to buy a smaller home that my child will inherit into a third party special needs trust.

Thank you!
Last edited by startabatha on Mon Jun 27, 2022 5:24 pm, edited 1 time in total.
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Lee_WSP
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Re: House, revocable trust tax question

Post by Lee_WSP »

Doesn't matter between 1, 2, or 3. The trust will pay the capital gains rate applicable. There may be zero or negative capital gains, but that is the tax.
paradisenostril
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Re: House, revocable trust tax question

Post by paradisenostril »

The house will receive a step up in basis to the appraised value as of your date of death. There would likely be negligible or no taxes if the house is sold/transferred soon after death. If the trust sells the house several years later, there would be capital gains tax on the appreciation since the basis step up.
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startabatha
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Re: House, revocable trust tax question

Post by startabatha »

Thank you so very much. I really appreciate it.

I was wondering, is there even a need for the house to go into a revocable living trust? I just read this:

Keeping Your House Out of Probate
A growing number of states, including Texas, now offer an easy alternative for real estate transfer to beneficiaries. You can use a transfer on death deed to transfer real property to a named beneficiary when you pass, without probate.

From:

https://yourtexaslegacy.com/blog/estate ... eeds-trust


I am in a state that allows a transfer on death deed. Couldn't I just do a transfer on death deed for my house to go straight into my adult child's special needs trust?

Thoughts?
paradisenostril
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Re: House, revocable trust tax question

Post by paradisenostril »

There are several ways to go about it and an attorney who knows the laws in your state can provide the best answer. You mentioned in your original post that you want the house to be sold within two years of your death. Perhaps you want to provide some flexibility to the trustee in making that decision? Or maybe your opinion on that could change before you die? A RLT is good for having terms that are either specific or flexible, depending on your preferences, which can be modified until it becomes irrevocable upon your death.

In an SLT, you can't make changes to the terms after it's set up. To me, it does seem safer to have the house in the RLT then have it transferred to the SNT because you may want to make changes before you die regarding when/how the house is sold. However, your idea of a POD deed is sound in that it eliminates the need for two trusts. You should be able to designate the SNT as the beneficiary on the deed.

A third option is to simply have the house probated according to your last will. You could direct the house to the SNT or direct the executor to sell the house then move the funds to the SNT. That is a simple option however may result in unnecessary lawyer fees/taxes/administrative costs depending on your state.
Topic Author
startabatha
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Re: House, revocable trust tax question

Post by startabatha »

paradisenostril wrote: Tue Jun 28, 2022 5:51 pm There are several ways to go about it and an attorney who knows the laws in your state can provide the best answer. You mentioned in your original post that you want the house to be sold within two years of your death. Perhaps you want to provide some flexibility to the trustee in making that decision?

——-Perhaps, but the house will be too large for just my son or even him and a caregiver.


Or maybe your opinion on that could change before you die? A RLT is good for having terms that are either specific or flexible, depending on your preferences, which can be modified until it becomes irrevocable upon your death.

———I just want to make sure the house goes to my child’s SNT upon my death. That’s the important part,


In an SLT, you can't make changes to the terms after it's set up.

——-The attorney I spoke with said that SNT can be revocable until it is funded, then it becomes irrevocable.

To me, it does seem safer to have the house in the RLT then have it transferred to the SNT because you may want to make changes before you die regarding when/how the house is sold. However, your idea of a POD deed is sound in that it eliminates the need for two trusts. You should be able to designate the SNT as the beneficiary on the deed.

——-With the SNT bring revocable until funded, I will have the ability to make changes to it for some time. It is possible that it could get funded sooner than my death if family members make contributions to it. Then it will become irrevocable.

——-I am the trustee of my sons SNT, and my brother will be successor trustee. Couldn’t I put verbiage in the SNT that once the house is deeded to the SNT, the house should be sold within two years?

A third option is to simply have the house probated according to your last will. You could direct the house to the SNT or direct the executor to sell the house then move the funds to the SNT. That is a simple option however may result in unnecessary lawyer fees/taxes/administrative costs depending on your state.
——I like the option of POD deed the best as it seems the simplest.
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celia
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Re: House, revocable trust tax question

Post by celia »

startabatha wrote: Mon Jun 27, 2022 4:46 pm Caveat: The above scenarios are worst case scenarios if I die before I retire in ten years and sell the house on my own.
I’m pretty sure you won’t be able to sell your house after you die, unless you were already in escrow that day.

Your executor or trustee could sell it for you. Hopefully, you will make it easy for them and they will have other things to do for your estate besides signing escrow papers.
paradisenostril
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Re: House, revocable trust tax question

Post by paradisenostril »

startabatha wrote: Tue Jun 28, 2022 6:20 pm The attorney I spoke with said that SNT can be revocable until it is funded, then it becomes irrevocable.
That's fine if the attorney says it will be a valid trust after you die even though it will still be unfunded. Defer to him/her on this one.
startabatha wrote: Tue Jun 28, 2022 6:20 pm Couldn’t I put verbiage in the SNT that once the house is deeded to the SNT, the house should be sold within two years?
Yes, I think that should be fine. You might add language about what the trustee can/should do with the proceeds (rent payments or purchase smaller home).
bsteiner
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Re: House, revocable trust tax question

Post by bsteiner »

If you’re in California you probably would. If you’re in Texas you probably wouldn’t. What state are you in?
Topic Author
startabatha
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Re: House, revocable trust tax question

Post by startabatha »

celia wrote: Tue Jun 28, 2022 6:41 pm
startabatha wrote: Mon Jun 27, 2022 4:46 pm Caveat: The above scenarios are worst case scenarios if I die before I retire in ten years and sell the house on my own.
I’m pretty sure you won’t be able to sell your house after you die, unless you were already in escrow that day.

Your executor or trustee could sell it for you. Hopefully, you will make it easy for them and they will have other things to do for your estate besides signing escrow papers.
---- Lol. I mean the acting trustee of my child's special needs trust would have the ability to sell the house after I die and it gets deeded to the trust. When I said “retire in ten years and sell the house on my own” I meant I’m still living in ten years.
Last edited by startabatha on Tue Jun 28, 2022 10:52 pm, edited 1 time in total.
Topic Author
startabatha
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Re: House, revocable trust tax question

Post by startabatha »

bsteiner wrote: Tue Jun 28, 2022 8:01 pm If you’re in California you probably would. If you’re in Texas you probably wouldn’t. What state are you in?
I’m in Texas,

Are you saying that there is no need for the house to go into a revocable living trust in Texas?
Last edited by startabatha on Tue Jun 28, 2022 9:53 pm, edited 1 time in total.
bsteiner
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Re: House, revocable trust tax question

Post by bsteiner »

startabatha wrote: Tue Jun 28, 2022 9:46 pm
bsteiner wrote: Tue Jun 28, 2022 8:01 pm If you’re in California you probably would. If you’re in Texas you probably wouldn’t. What state are you in?
Texas. So what wouldn’t I do? I’m not sure what question you are answering,
You would probably not create a revocable trust in Texas since probating a Will in Texas isn't difficult.
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startabatha
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Re: House, revocable trust tax question

Post by startabatha »

Couldn’t I simply do a transfer on death deed to my child’s special needs trust, and wouldn’t this avoid probate?
paradisenostril
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Re: House, revocable trust tax question

Post by paradisenostril »

startabatha wrote: Tue Jun 28, 2022 10:00 pm Couldn’t I simply do a transfer on death deed to my child’s special needs trust, and wouldn’t this avoid probate?
Bsteiner's point is that it's simple to probate the estate (including the house) in your state so it might be easier to not bother obtaining the POD deed. Just direct the house to the SNT in your last will and your executor will arrange for the deed to be changed to the SNT.

Can't verify if that's true in TX and there may be some other reasons to do the POD like limiting creditors' claim to the house.
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