My mother-in-law, an Illinois resident, passed away a couple of weeks ago. My father-in-law died in the year 2000. In 1998 the couple set up two separate trusts, presumably an A-B trust arrangement. My wife and brother-in-law are the beneficiaries under both her and her late husband's trusts.
at the time the trusts were set up, the couple's personal residence was placed into each of the two trusts -- one half in my late father-in-law's trust, one-half in my mother-in-law's trust. I'm not sure what the purpose of this was for a couple of reasons. First, the home gets a step-up in basis to the value as of the date of death, which means that now the home must be valued 1/2 as of the date my father-in-law died (the year 2000), and 1/2 as of right now. That means, does it not, that if my wife and brother-in-law now sell the home that capital gains tax would be due on the appreciation since 2000 on the half owned by the deceased husband's trust? Incidentally, Illinois is not a community property state.
Secondly, what would have happened if my mother-in-law had attempted to sell the home a couple of years ago? She did have the power to do this since she was both beneficiary and trustee of both trusts following her husband's death. However, since her late husband's trust owned half the home, wouldn't she have been precluded from using the §121 tax exclusion on the half owned by her late husband's trust? She would not have met the requirement of having lived in and owned the home, or at least that piece of it, for two of the preceding 5 years, correct?
Typically isn't there only one trust while both parties are alive, and it is then split into A-B components upon the death of the first spouse? Am I missing something here? I'm just trying to decide, for future planning, whether it was good strategy to have placed real estate one-half in each trust.
at the time the trusts were set up, the couple's personal residence was placed into each of the two trusts -- one half in my late father-in-law's trust, one-half in my mother-in-law's trust. I'm not sure what the purpose of this was for a couple of reasons. First, the home gets a step-up in basis to the value as of the date of death, which means that now the home must be valued 1/2 as of the date my father-in-law died (the year 2000), and 1/2 as of right now. That means, does it not, that if my wife and brother-in-law now sell the home that capital gains tax would be due on the appreciation since 2000 on the half owned by the deceased husband's trust? Incidentally, Illinois is not a community property state.
Secondly, what would have happened if my mother-in-law had attempted to sell the home a couple of years ago? She did have the power to do this since she was both beneficiary and trustee of both trusts following her husband's death. However, since her late husband's trust owned half the home, wouldn't she have been precluded from using the §121 tax exclusion on the half owned by her late husband's trust? She would not have met the requirement of having lived in and owned the home, or at least that piece of it, for two of the preceding 5 years, correct?
Typically isn't there only one trust while both parties are alive, and it is then split into A-B components upon the death of the first spouse? Am I missing something here? I'm just trying to decide, for future planning, whether it was good strategy to have placed real estate one-half in each trust.
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