Living trust income problem

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Mr. Potter
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Living trust income problem

Post by Mr. Potter »

We have a situation with a farm in a revocable living trust. My MIL is being forced to sell around 5 acres for a transmission line. This will generate around $30k. My question is can this money somehow stay in the living trust? The income will possibly mess up her senior living situation which is partially subsidized.
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Re: Living trust income problem

Post by Mullins »

Income to a revocable trust is taxable to the individual trustee of that trust. That would be your MIL? Keeping the funds "in" the trust, for instance, by placing the proceeds in a bank account titled under the trust, wouldn't eliminate the tax liability. And, any interest or dividends generated by the new money going forward would be taxable, even if they're within an account titled under the revocable trust.
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Re: Living trust income problem

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Thanks, that’s what I was afraid of.
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Re: Living trust income problem

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toddthebod
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Re: Living trust income problem

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Mr. Potter wrote: Sun Oct 13, 2024 9:26 am We have a situation with a farm in a revocable living trust. My MIL is being forced to sell around 5 acres for a transmission line. This will generate around $30k. My question is can this money somehow stay in the living trust? The income will possibly mess up her senior living situation which is partially subsidized.
As far as the IRS and every state or federal benefit I have heard of, revocable trusts are completely see-through, e.g., they pretend they don't exist.
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Re: Living trust income problem

Post by mw1739 »

What’s her basis on the land? The $30k wouldn’t be all profit.
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Re: Living trust income problem

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What’s her basis on the land? The $30k wouldn’t be all profit.
The land has been in the family since the late 1800’s. Very sketchy records of inheritances and hand shake agreements. Let’s just say the cost basis is 100%
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Re: Living trust income problem

Post by HomeStretch »

Will the $30k cause her to be booted from her subsidized housing? Or will it just increase the amount she pays for housing for the tax year until her income reverts to normal in the following tax year?

Can MIL gift the property to a family member prior to sale so she doesn’t receive any income on the sale?
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Re: Living trust income problem

Post by wangle »

It sounds like part of the farm was condemned by the government on behalf of a utility company. If this is the case, then you might have some remedies. If this sale qualifies as an involuntary conversion, section 1033, then the gains can be deferred for years. Personal homes get 2 years and business/rental property gets 3 years. The idea is that you'll want to exchange the few acres she was forced to sell for something similar. There are plenty of 1033 articles online.
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Re: Living trust income problem

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Will the $30k cause her to be booted from her subsidized housing?
The income limit for her housing is $38k. She is currently around $30k between an RMD + SS. So yes, this will definitely push her past the income limit. If this causes her to lose her apartment it will be a big problem.
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Re: Living trust income problem

Post by drzzzzz »

If she is over age 70.5 and charitably inclined, consider using part of her RMD as a QCD which will reduce her taxable income.
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Re: Living trust income problem

Post by Peter Foley »

It is not particularly difficult to come up with a cost basis for property that has been in a family for some time.

My brother and I inherited property that was homesteaded by my grandfather in 1903. We sold the property in 2020. It got a stepped up basis when my grandfather died in 1939, then again when my father died in 1973. Tax records for 1973 show the property value at that point in time.
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Re: Living trust income problem

Post by LotsaGray »

Mr. Potter wrote: Sun Oct 13, 2024 3:41 pm
Will the $30k cause her to be booted from her subsidized housing?
The income limit for her housing is $38k. She is currently around $30k between an RMD + SS. So yes, this will definitely push her past the income limit. If this causes her to lose her apartment it will be a big problem.
I am very surprised a revocable trust can be use to shelter income or assets to allow a state or local govt subsidy.
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Re: Living trust income problem

Post by wangle »

drzzzzz wrote: Sun Oct 13, 2024 5:43 pm If she is over age 70.5 and charitably inclined, consider using part of her RMD as a QCD which will reduce her taxable income.
Yes, this is one of a few ways you can keep her income below the $30K level. You'll want to work with your tax adviser to work out the numbers.
I would first see if the sale can qualify as an 1033 election, then you can defer the capital tax gain for a few years.
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Re: Living trust income problem

Post by JBTX »

LotsaGray wrote: Sun Oct 13, 2024 11:19 pm
Mr. Potter wrote: Sun Oct 13, 2024 3:41 pm
The income limit for her housing is $38k. She is currently around $30k between an RMD + SS. So yes, this will definitely push her past the income limit. If this causes her to lose her apartment it will be a big problem.
I am very surprised a revocable trust can be use to shelter income or assets to allow a state or local govt subsidy.
The issue is the income, not the revocable trust. I agree with you the revocable trust likely doesn’t provide any protection for government benefits.

Could the property be put into a irrevocable trust before the sale?

I would have thought there would have been step up in basis over the years
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Re: Living trust income problem

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I am very surprised a revocable trust can be use to shelter income or assets to allow a state or local govt subsidy.
That makes 2 of us. I filled out the paperwork and was very clear my MIL owned a non-working farm. I was told as long as the farm generated no income it would not count against the income limit. It’s not much of a subsidy, actually value is probably worth 200-300/month. My MIl still has to pay $1,200/ month for a one bedroom apartment, this is in a very LCOL area.
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Re: Living trust income problem

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I would have thought there would have been step up in basis over the years.
I’m sure if we had to we could guess at some stepped up basis, it would only be a guess, though inheritances and buying siblings out for their portion and handshake agreements it would be challenging coming up with a number. The plan was to sell when my 85 yo MIL passes away.
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 4:49 am
I am very surprised a revocable trust can be use to shelter income or assets to allow a state or local govt subsidy.
That makes 2 of us. I filled out the paperwork and was very clear my MIL owned a non-working farm. I was told as long as the farm generated no income it would not count against the income limit. It’s not much of a subsidy, actually value is probably worth 200-300/month. My MIl still has to pay $1,200/ month for a one bedroom apartment, this is in a very LCOL area.
It sounds like the subsidized housing assistance only has an income test and not an asset test. The revocable trust doesn’t shield either as the $30k in trust property sale income will be counted against her in the assistance income test.

Have you been able to definitively determine whether the $30k income, if received by her/RLT, will cause her to lose her apartment or just the subsidy (for 1 tax year)?

The loss of the subsidy is a lesser issue as that is only $2k-$4k for 1 tax year. It doesn’t seem like giving away $30k via something like a QCD, if she is able to, makes sense when she could forfeit 1 year subsidy and keep the remaining sale proceeds of $26k.
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Re: Living trust income problem

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Have you been able to definitively determine whether the $30k income, if received by her/RLT, will cause her to lose her apartment or just the subsidy (for 1 tax year)?
We are still toward the front end of the actual settlement for the property. The Utility Company who has been awarded an easement has offered her $30k, now we find out there’s a second request by another power company seeking an easement. By the time they get done the farm will look more like an electrical substation. We are hiring a law firm to fight for her, they work on a contingency basis so no out of pocket costs for MIL. Who knows, by the time this gets settled my MIL may not even be around.
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Re: Living trust income problem

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JBTX wrote: Mon Oct 14, 2024 12:30 amCould the property be put into a irrevocable trust before the sale?
Mr. Potter:

Did you note this comment?

If the property was divided before the sale and the parcel in question was placed in an irrevocable trust then the income from the sale would flow into the irrevocable trust and not to your MIL.
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Re: Living trust income problem

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If the property was divided before the sale and the parcel in question was placed in an irrevocable trust then the income from the sale would flow into the irrevocable trust and not to your MIL.
Probably a good idea, years ago when my FIL was still in the picture this was discussed. Due to some unforeseen developments it would have been a disaster 10 years later. There are a couple moving parts, if the 2nd power line is approved the 30k could double, also our lawyer is seeking much more than the value of selling 5-10 acres, this project could potentially greatly devalue the entire property. Also the MIL is almost 86 and not in great health. We have considered selling the entire property but with the MIL still around that would trigger big time capital gains.
Last edited by Mr. Potter on Mon Oct 14, 2024 8:49 am, edited 1 time in total.
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Re: Living trust income problem

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Clearly the solution is for her to give it away before the sale. It doesn't seem worth the cost to hire an attorney to create an irrevocable trust.
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 8:47 am
If the property was divided before the sale and the parcel in question was placed in an irrevocable trust then the income from the sale would flow into the irrevocable trust and not to your MIL.
Probably a good idea, years ago when my FIL was still in the picture this was discussed. Due to some unforeseen developments it would have been a disaster 10 years later. There are a couple moving parts, if the 2nd power line is approved the 30k could double, also our lawyer is seeking much more than the value of selling 5-10 acres, this project could potentially greatly devalue the entire property. Also the MIL is almost 86 and not in great health.
An irrevocable trust for $30,000 is not worth the effort. She should just give the land to one of her kids.
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Re: Living trust income problem

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She should just give the land to one of her kids.
I like this idea, there’s 3 sisters named as beneficiaries when grandma passes away, if she could just pass the land sale profit to her daughters that would be ideal. I’m guessing the MIL is still on the hook for the income though.
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 9:14 am
She should just give the land to one of her kids.
I like this idea, there’s 3 sisters named as beneficiaries when grandma passes away, if she could just pass the land sale profit to her daughters that would be ideal. I’m guessing the MIL is still on the hook for the income though.
No, she needs to give the land away before the sale.
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 5:41 am
Have you been able to definitively determine whether the $30k income, if received by her/RLT, will cause her to lose her apartment or just the subsidy (for 1 tax year)?
We are still toward the front end of the actual settlement for the property. The Utility Company who has been awarded an easement has offered her $30k, now we find out there’s a second request by another power company seeking an easement. By the time they get done the farm will look more like an electrical substation. We are hiring a law firm to fight for her, they work on a contingency basis so no out of pocket costs for MIL. Who knows, by the time this gets settled my MIL may not even be around.
Okay but it should be relatively easy to review the housing assistance website or application filed to see whether additional income over the limit is a big issue (becoming ineligible for housing), small issue (losing the $3-$4k subsidy for 1 year) or non-issue.

If a big issue (losing housing), you will have time to figure out whether the parcel should be subdivided, if required, and transferred out of the RLT to an irrevocable trust or gifted. Any transfer takes time and should be done prior to the sale so the proceeds are made payable to the new trust/owner(s).
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Re: Living trust income problem

Post by Mr. Potter »

Okay but it should be relatively easy to review the housing assistance website or application filed to see whether additional income over the limit is a big issue (becoming ineligible for housing), small issue (losing the $3-$4k subsidy for 1 year) or non-issue.
Thanks HomeStretch, I will give the property manager a call, fingers crossed for good news.
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Re: Living trust income problem

Post by LotsaGray »

JBTX wrote: Mon Oct 14, 2024 12:30 am
LotsaGray wrote: Sun Oct 13, 2024 11:19 pm

I am very surprised a revocable trust can be use to shelter income or assets to allow a state or local govt subsidy.
The issue is the income, not the revocable trust. I agree with you the revocable trust likely doesn’t provide any protection for government benefits.

Could the property be put into a irrevocable trust before the sale?

I would have thought there would have been step up in basis over the years
My point is that op is claiming the revocable trust is already sheltering income to enable a subsidy.

I don’t think moving to irrevocable trust now will help. Almost any govt subsidy or aid will see this and almost all have a look back just to avoid these things.
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Re: Living trust income problem

Post by LotsaGray »

Mr. Potter wrote: Mon Oct 14, 2024 4:49 am
I am very surprised a revocable trust can be use to shelter income or assets to allow a state or local govt subsidy.
That makes 2 of us. I filled out the paperwork and was very clear my MIL owned a non-working farm. I was told as long as the farm generated no income it would not count against the income limit. It’s not much of a subsidy, actually value is probably worth 200-300/month. My MIl still has to pay $1,200/ month for a one bedroom apartment, this is in a very LCOL area.
This is a very different claim. You originally implied that a revocable trust was allowing the subsidy. Now you talk about a non income producing asset. Ofc a farm producing no income won’t count as income. Many though not all aid programs do not require including real property as part of qualifying. They don’t want to force selling long held property.

If the trust was irrevocable then this income probably would not have to count as income. There might be tax issues. However as a revocable trust, wither the 30k stays in this trust or not.
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Re: Living trust income problem

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The trust is revocable, I understand if it were irrevocable it would be a different story. I suppose the MIL could give away the acreage in the easement but that would involve amending the trust and surveying the property which would probably cost more than any other option.
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Re: Living trust income problem

Post by wangle »

1033.
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Re: Living trust income problem

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1033.
I’m not sure how the 1033 exchange would help. My MIL is 85 and has no intention of purchasing another property. She is very content to pay her rent and live out her life in this senior housing apartment complex. I suppose she could buy a property with the intention of passing it on to her heirs but that is getting complicated. Hopefully the senior housing just suspends her small subsidy for a year.
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 12:31 pm
1033.
I’m not sure how the 1033 exchange would help. My MIL is 85 and has no intention of purchasing another property. She is very content to pay her rent and live out her life in this senior housing apartment complex. I suppose she could buy a property with the intention of passing it on to her heirs but that is getting complicated. Hopefully the senior housing just suspends her small subsidy for a year.
1033 defers the capital gains from the sale of the land due to the easement. You have 2-3 years to find and purchase an equivalent property (a piece of farmland or an empty plot somewhere). Can find $30k + worth of land somewhere and buy it and then when she passes, it would pass on to her heirs. I know she doesn't want to buy more property but it's for the deferring the cap gains only. Especially if they are going to keep taking easements.
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Re: Living trust income problem

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1033 defers the capital gains from the sale of the land due to the easement. You have 2-3 years to find and purchase an equivalent property (a piece of farmland or an empty plot somewhere). Can find $30k + worth of land somewhere and buy it and then when she passes, it would pass on to her heirs. I know she doesn't want to buy more property but it's for the deferring the cap gains only. Especially if they are going to keep taking easements.
Thanks, so if I understand this correctly say she gets $30k, she can do whatever she wants with the cash and defer any taxes for up to 2-3 years. At that point she must have reinvested in another property (I assume, not bare land) and then this would eliminate the cap gains. She would not have to report this as income during that time frame, it’s like it never happened. If she were to die during this delay it would get a stepped up basis and no cap gains would apply??? Am I understanding this correctly?
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 11:46 am The trust is revocable, I understand if it were irrevocable it would be a different story. I suppose the MIL could give away the acreage in the easement but that would involve amending the trust and surveying the property which would probably cost more than any other option.
Why would you need to amend the trust? You can usually move assets in and out of a revocable trust at your leisure. And why would you need a survey? Just retitle the land to the kids. Done. Problem solved.
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Re: Living trust income problem

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Why would you need to amend the trust? You can usually move assets in and out of a revocable trust at your leisure. And why would you need a survey? Just retitle the land to the kids.
This would be the cleanest approach. Also, the power company is documenting the land they are forcefully buying so by default they are probably responsible for reporting/documenting the new boundaries, note, this easement dissects the property in 2 large sections.
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 2:47 pm
1033 defers the capital gains from the sale of the land due to the easement. You have 2-3 years to find and purchase an equivalent property (a piece of farmland or an empty plot somewhere). Can find $30k + worth of land somewhere and buy it and then when she passes, it would pass on to her heirs. I know she doesn't want to buy more property but it's for the deferring the cap gains only. Especially if they are going to keep taking easements.
Thanks, so if I understand this correctly say she gets $30k, she can do whatever she wants with the cash and defer any taxes for up to 2-3 years. At that point she must have reinvested in another property (I assume, not bare land) and then this would eliminate the cap gains. She would not have to report this as income during that time frame, it’s like it never happened. If she were to die during this delay it would get a stepped up basis and no cap gains would apply??? Am I understanding this correctly?
This is correct. If the farm is not a business asset, then you have to acquire the new property 2 years after the end of the taxable year (if sold in 2024, then you have until Dec 31, 2026).
Say in a year you helped your MIL buy a small plot of land worth $50,000, then her capital gains would be deferred by transferring the old basis into the new property. Subtract her old basis from the new basis. $50,000 - (adjusted basis of the $30,000 farm land) = new basis for the new plot of land.
When she passes away, the new plot of land would get a step up basis to FMV. I think this way would be the easiest way and gives you 2+ years to work something out.

You can read the tax law section 1033 here.
https://www.law.cornell.edu/uscode/text/26/1033
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Re: Living trust income problem

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Mr. Potter wrote: Mon Oct 14, 2024 3:22 pm
Why would you need to amend the trust? You can usually move assets in and out of a revocable trust at your leisure. And why would you need a survey? Just retitle the land to the kids.
This would be the cleanest approach. Also, the power company is documenting the land they are forcefully buying so by default they are probably responsible for reporting/documenting the new boundaries, note, this easement dissects the property in 2 large sections.
I think that is all a distraction and you're getting lost in the weeds a bit. The land is deeded to your MIL's revocable trust. All that needs to happen is the trustee deeding the house to the three daughters. It's a simple process that any attorney can help you with.
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Re: Living trust income problem

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think that is all a distraction and you're getting lost in the weeds a bit. The land is deeded to your MIL's revocable trust. All that needs to happen is the trustee deeding the house to the three daughters.
As I’m thinking about this wouldn’t this bring us right back to figuring out the cost basis. Each daughter gets 10k which is nice minus the cap gains, whatever they are. I think the 1033 option and delaying this a couple years sounds good.
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Re: Living trust income problem

Post by toddthebod »

Mr. Potter wrote: Mon Oct 14, 2024 3:45 pm
think that is all a distraction and you're getting lost in the weeds a bit. The land is deeded to your MIL's revocable trust. All that needs to happen is the trustee deeding the house to the three daughters.
As I’m thinking about this wouldn’t this bring us right back to figuring out the cost basis. Each daughter gets 10k which is nice minus the cap gains, whatever they are. I think the 1033 option and delaying this a couple years sounds good.
The daughters can worry about that if it's worth $1,500 to them. It solves your MIL's problem.

Plus I'm fairly sure you'll need to know the basis in order to report the 1033 conversion.
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Re: Living trust income problem

Post by wangle »

Yeah gifting the property would kick the basis question down the road for the daughters to figure out. Still have to figure out the cost basis.
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Re: Living trust income problem

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Don’t want to sound cruel but my MIL is almost 86 and in poor health. This is why we moved her to a senior living apartment. Not sure how this works but if she passes in the next couple years I’m thinking the entire property including the easement portion would get a new stepped up basis. Selling it after her death was the plan, at least until this forced sale came up.
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Re: Living trust income problem

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Mr. Potter wrote: Tue Oct 15, 2024 5:55 am Don’t want to sound cruel but my MIL is almost 86 and in poor health. This is why we moved her to a senior living apartment. Not sure how this works but if she passes in the next couple years I’m thinking the entire property including the easement portion would get a new stepped up basis. Selling it after her death was the plan, at least until this forced sale came up.
Okay, but you're risking her losing her housing to save at most a couple thousand dollars.
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Re: Living trust income problem

Post by brooklynboy »

i suggest consulting with a good elder law attorney. this is not such a unique situation.
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