Trust

[project37]

California:

Our mother setup a revocable "living trust" with my father prior to him passing a few years ago.
Basically, the trust states that her real estate (house is currently paid off) will be sold at the time of her death and the profits would be split amongst the surviving children.

Our mother has decided to sell the house to one of her children, which has been verbally agreed apon by the rest of the surviving children named in the trust.

Is it advisable to cancel the current trust and create a new one, or?
What steps are advised and required by law to move forward with the selling of the property?

 

[TrustUser]

if i was your mom, i would place the real estate in a separate trust with the one child as a beneficiary. but where the child would inherit it at death, and not have it sold to her while mom is alive.

 

[project37]

Follow-up

if i was your mom, i would place the real estate in a separate trust with the one child as a beneficiary. but where the child would inherit it at death, and not have it sold to her while mom is alive.

What would be your logic behind having one child inherit the house at the time of death versus selling it now and splitting the profits amongst the other 5 children?

I'm seeking a legal path going forward, we don't want any issues with the current trust, thus questioning whether a new trust be drawn, avoiding a possible probate issue, etc.

 

[anteater]

What would be your logic behind having one child inherit the house at the time of death versus selling it now and splitting the profits amongst the other 5 children?

I'm seeking a legal path going forward, we don't want any issues with the current trust, thus questioning whether a new trust be drawn, avoiding a possible probate issue, etc.

The difficulty is that nobody here can read the trust. It is tough to answer the kind of question that you asked without knowing what the trust states, what assets are in the trust, etc.

I buy a truck to haul hay. I get out of the hay hauling business and decide that I am getting into the brick hauling business. Do I dispose of my truck just because I am changing what I am hauling? Maybe, yes; maybe, no. Maybe my truck can't handle brick hauling. But, if it can, buying a new one would be kind of extravagant.

The trust is the "truck." If it still meets the requirements of the job, there is no particular reason to dispose of it and "buy" another.

 

[curb1]

What assets are in the trust? Just the house?

If just the house is in the trust there is a decent possibility that mother could sell the house, tear up the trust and be done. But again, the trust might have language that would not make that possible.

Why would mother want to create a new trust? What other assets does your mother have?

 

[TrustUser]

What would be your logic behind having one child inherit the house at the time of death versus selling it now and splitting the profits amongst the other 5 children?

I'm seeking a legal path going forward, we don't want any issues with the current trust, thus questioning whether a new trust be drawn, avoiding a possible probate issue, etc.

i am seeing contradictions in your statements ?

your original post states that the mother has chosen to sell the house to one child, and this is agreed to by the other children ? nothing was mentioned about splitting the profits.

i was assuming that the other children agreed to the one child getting the house as her share. and that the other 4 children would split the remaining assets. and all felt that this was a fair split ?

my response also was based on the assumption that nothing in the current trust would prohibit this action, since nothing was mentioned about it doing so.

when a spouse dies, typically one of 2 things occurs. either the surviving spouse ends up with complete control of the trust, or the trust is split into 2 shares. if it was split into 2 shares, your mom would typically only have control of the survivor share.

the reason for inheritance are several, but one is that the child would have a basis in it at the time of death, which could be considerably higher than beforehand. this would lessen the amount of gain, and therefore capital gains tax on it if and when the child might choose to sell it.

 

[project37]

Reply

i am seeing contradictions in your statements ?

your original post states that the mother has chosen to sell the house to one child, and this is agreed to by the other children ? nothing was mentioned about splitting the profits.

i was assuming that the other children agreed to the one child getting the house as her share. and that the other 4 children would split the remaining assets. and all felt that this was a fair split ?

my response also was based on the assumption that nothing in the current trust would prohibit this action, since nothing was mentioned about it doing so.

when a spouse dies, typically one of 2 things occurs. either the surviving spouse ends up with complete control of the trust, or the trust is split into 2 shares. if it was split into 2 shares, your mom would typically only have control of the survivor share.

the reason for inheritance are several, but one is that the child would have a basis in it at the time of death, which could be considerably higher than beforehand. this would lessen the amount of gain, and therefore capital gains tax on it if and when the child might choose to sell it.

With all due respect, my original statement did state that the selling of the property profits would be split by the children.
So therefore I see no contradiction on my part.

"Basically, the trust states that her real estate (house is currently paid off) will be sold at the time of her death and the profits would be split amongst the surviving children."

 

[project37]

Reply

What assets are in the trust? Just the house?

If just the house is in the trust there is a decent possibility that mother could sell the house, tear up the trust and be done. But again, the trust might have language that would not make that possible.

Why would mother want to create a new trust? What other assets does your mother have?

The current trust includes both the house and savings.

NOTE: All participants are verbally in agreement.

Our plan would be:

1. Revoke current trust.
2. Create new trust including only the savings.
3. Sell the house to the 1 child, split the profits now, equally
amongst all the children.
4. Take a shot of tequila!

 

[curb1]

1) Sell the house now. Future capital gains (needing stepped-up basis) should not be a problem unless this is an expensive house.

2) The savings can be designated to whomever at the bank without using a trust. The savings would pass to whomever is listed at the bank at time of mother's passing. Call bank for instructions.

3) Tear up the trust.

This plan is subject to the unknowns that might be in the trust that we are unaware.

 

[anteater]

The current trust includes both the house and savings.

NOTE: All participants are verbally in agreement.

Our plan would be:

1. Revoke current trust.
2. Create new trust including only the savings.
3. Sell the house to the 1 child, split the profits now, equally
amongst all the children.
4. Take a shot of tequila!

I can certainly understand #4!

But why do you feel that you have to do #1 and #2? Just because an asset was included in the existing trust and then is disposed of does not invalidate the trust. It only means that provisions related to the disposition/distribution of that asset are no longer applicable. Does the sale of the house now somehow mess up the overall eventual distribution of assets that the trust envisioned?

Are y'all consulting with an experienced estate planner or are y'all just sort of winging this?

 

[project37]

I can certainly understand #4!

But why do you feel that you have to do #1 and #2? Just because an asset was included in the existing trust and then is disposed of does not invalidate the trust. It only means that provisions related to the disposition/distribution of that asset are no longer applicable. Does the sale of the house now somehow mess up the overall eventual distribution of assets that the trust envisioned?

Are y'all consulting with an experienced estate planner or are y'all just sort of winging this?

Thank you all for the additional information and guidance regarding this matter. It's truly appreciated!

We are winging it, but carefully! Perhaps an estate planner should be taken into serious consideration.
The sale of the house now, does not mess up the eventual distribution.

 

[anteater]

The sale of the house now, does not mess up the eventual distribution.

OK. That leaves me scratching my head about why you are thinking that a new trust must be created.

Maybe all you need is an hour of an estate planning attorney's time to give you a "Trusts 101" mini-course, read the trust, and tell you whether everything is cool or not.

 

[curb1]

I think the real question is, "why do they need a trust?"

This sounds like a very clean situation. Sell the house, then put the money in the existing bank accounts and title the accounts appropriately for distribution.

Sounds like all involved are in agreement. No need to make it messy.

 

[TrustUser]

With all due respect, my original statement did state that the selling of the property profits would be split by the children.
So therefore I see no contradiction on my part.

"Basically, the trust states that her real estate (house is currently paid off) will be sold at the time of her death and the profits would be split amongst the surviving children."

your wording could have been better. you used the term "real estate", and then in parentheses told us that her house has no mortgage. this insinuates that there is other real estate.

if you had wanted to be concise, you should have simply said that her house (which is currently paid off) will be sold at her death. then it would have been more obvious that the only real estate that she had was her house.

now, getting back to your question - are there any income tax implications for your mom, due to her selling it ? are there any property tax implications that are different in your state, regarding selling versus inheritance.

as far as i know, a single person can deduct the first 250,000 from the sale of a personal residence ? i dont know what her house is worth ?

also, in california, we have rules that allow children to keep the same property tax basis upon inheritance. i dont think this is true if a parent sells the house to the child. you might want to verify what rules, if any, apply in your state, regarding property tax.

any tax paid by your mom because of the sale, needs to be added to the equation, since the amount of cash that is inherited will be lessened by that same amount.

appreciation in real estate can sometimes be a big deal. how long is mom expected to live ? capital gains issues need to be properly addressed.

if house is sold to child, what happens to mom's living situation ? just remember that mom loses legal control of that house, unless there is some sort of life estate attached to it.

since you have not contacted a financial planner as of yet, i am not convinced that you are aware of all of the ramifications of this decision.

i would strongly suggest that you talk to a professional of some sort. accountants work with taxes every day, so they are apt to be a great choice regarding those issues.