Taking Property out of Living Trust

[fzanka1130]

What is the name of your state (only U.S. law)? California

I am the sole executor of a Living Trust created by my parents. One parent is deceased, the other an Alzhiemers patient. 2 years ago, my surviving parent resigned from the Trust and quitclaimed the property to me. 1 year ago, I took the property out of Trust and took a Line of Credit out against the property to pay for her care. The property had been free and clear for 15 years. The property was purchased for $27,000 and currently has a market value of $380,000. If I sell the property before my parent dies, will the sale be subject to Capital Gains tax? My CPA says yes, the Trust attorney says no...because my parent gifted the property to me. Who is right? (CPA says if parent is deceased, then no capital gains)

[nextwife]

How was title held when he "quit claimed to you"? Did the trust quit claim (he as trustee) it or he personally? Did you put it into the trust after he quit cliamed to you??

[fzanka1130]

No, I took the property out of the Trust (as sole Trustee) after it was quitclaimed to me. It is still out of the Trust.

I think the following applies...

When the property was quitclaimed to me, it acquired a new tax basis of fair market value as of the date of transfer. My mother incurred a gift tax liability on that date for that basis value. If the amount was less than $1,000,000, and it was, and my mother had not used any of her other lifetime gift tax exclusion, then she would owe no tax on that transaction, and I would incur none in receipt of the asset.

When I sell the property, any net proceeds of sale would be subject to capital gains tax (since it has not been my principal residence). What I am thinking now is that...at the time the property was quitclaimed to me it had a higher tax basis of fair market value (2006) than it does now..because it's fair market value has dropped about 15% (2009-present)....so there would be no capital gains....sound right?

[anteater]

When the property was quitclaimed to me, it acquired a new tax basis of fair market value as of the date of transfer.

Wrong.

What I am thinking now is that...at the time the property was quitclaimed to me it had a higher tax basis of fair market value (2006) than it does now..because it's fair market value has dropped about 15% (2009-present)....so there would be no capital gains....sound right?

Nope. Fair market value is only relevant with regard to the gift tax reporting. Gifting does not result in a step-up of basis to fair market value.

[TrustUser]

i am a little confused about the "quitclaim". the property was in trust before your mother stepped down from trusteeship ?

i am assuming that the property had been in her name as trustee, or in both of your names as trustees - before she stepped down ?

but somehow you ended up with the property in your name only, as trustee of the trust ?

you say you are the sole executor ? executors pertain to wills. so do you mean to say that you are the sole beneficiary or the sole trustee ? or both ?

at this point, you still would not be allowed to take the property out of trust, without the trust giving you instructions to be able to do so.

as anteater intimated, one of the reasons that a parent should not give a child real property before death, is that said child loses step-up basis upon the death of the parent.

had the item been left in trust, then you would still have gotten step-up basis (assuming you are the beneficiary). the fact that trusteeship changes, makes no difference.

i realize that it is sometimes difficult to get financing on real estate when in trust, which may have been why you took it out.

now, the property could certainly be placed back in the trust. but i am not sure just how the step-up basis works in that sort of convoluted series of events.

cpas are generally more knowledgeable about taxes than trust attorneys are - so you may want to consult with the one you are using, and get a backing second opinion from someone else - as to the best road for you to go down.

there may be things that can be done, while your mom is alive, that will better your situation.

[fzanka1130]

Yes, property in Trust before mother stepped down as co-Trustee leaving me as sole Trustee. Property had been in her name. I was named sole Trustee (as son) as she was progressing with health problems when she stepped down.

The rationale for doing this is that if the property needed to be liquidated to pay for her health costs, then it could easily be done (trust attorney). As its turned out, my mother is getting close to living past her accumulated savings (about another year left before no money left)...she is now a level 3 Alzheimers patient (she just turned 90).

The lender says its up to me if I want to put the property back in the Trust..they know the situation and say ok no problem. I may have to sell the property to pay for her healthcare (she gets medicare benefit and her social security but has consumed all her retirement).

So are you saying that the step-up basis would not accrue to me? It is my understanding that on the date that my mother quitclaimed the property to me it acquired a new tax basis of "fair market value". Next, she then became liable for a gift tax on that date for that basis value. However, CPA filing her taxes claimed a gift tax exclusion so no tax was due from her....or me (for recieving the asset). That date was 2 years ago...when property values were about 25% higher than they are now. It's my understanding that if I lived in the property as my principal residence for 2 years, then I would be eligible to deduct the first $250,000 from the proceeds exceeding the new tax basis at time of transfer (assuming it appreciated). However, the reality is that the properties fair market value has depreciated about %15 at this time. So....wouldnt it be prudent to sell now?

You are saying that I would not be able to utilize the "step-up"....but that logic conflicts with the property acquiring a new tax basis and then gifting it to me.

[FlyingRon]

First off, you did something very stupid, and you are still not being precise in your terms. Put the property back in her trust. A gift transfer will screw her for her much needed medicaid services.

As we have already told you, you do NOT get any stepped up basis from the transfer. You "understanding" is flat out wrong. Stepped up basis occurs only at death.

As pointed out the GIFT TAX issues have nothing to do with the basis. The gift tax applies only to the value of the property as it was gifted (and she doesn't subtract her basis from it).

Capital gains and estate/gift taxes are TWO completely different things.

If you own and live in the property for 24 out of 60, then yes you can exclude up to $250,000 of capital gain, but as we stated, as you've done the deal that capital gain is the difference between your sale price and your mother's (presumably quite low) basis. No step up.

[anteater]

Originally Posted by FlyingRon

As we have already told you, you do NOT get any stepped up basis from the transfer. You "understanding" is flat out wrong. Stepped up basis occurs only at death.

As pointed out the GIFT TAX issues have nothing to do with the basis. The gift tax applies only to the value of the property as it was gifted (and she doesn't subtract her basis from it).

Are you certain? Is that your final answer? Are you willing to negotiate?


The only question is what happened to the basis when the other parent passed away.

[fzanka1130]

Ron, maybe you didnt follow the thread. It's not my mothers Trust...she resigned at a time when I was co-Trustee...now I am the sole Trustee.

I'm not sure what your qualifications are...but they conflict with a licensed trust attorney and CPA...

...and dont F-in call me stupid...you know nothing about me or my situation

[TrustUser]

hi fz,

when a parent gives a child a house, the child's basis in the house is exactly the same basis as the parent had. there is no step-up in basis when the parent dies, because the parent no longer owns it. so the child permanently loses that step-up or step-down (in our latest economy - LOL).

i still think you are being imprecise in some of your terms. you say it was in your mother's name ? do you mean in your mother's name, as trustee ?

then you say she quitclaimed the property to you. but it sounds like it still stayed in the same trust.

so i dont yet have a clear understanding of how title actually changed.

trusts are completely different from individuals. so if you can, it would help if you used exact terms to describe exactly what happened. for example, the terminology "mom quitclaimed the property to me" would typically mean that mom as an individual quitclaimed the property to you as an individual.

i suspect that if the house is put back in the trust, that you will be able to get the step-up basis (when your mom dies). of course, if you have to sell it before mom dies, then there is nothing to talk about.

the concepts of gift tax and capital gains tax are two separate animals. when one refers to the "basis" in the property, that refers to "capital gains tax".

so if your mom had actually sold the property to someone for a certain amount of money, and assuming she had some sort of gain on it, she would be liable for capital gains tax (whatever rules apply), and the new owner would have a basis in the property of how much he actually spent to buy it.

a step-up in basis generally occurs when one spouse dies, or when both parents die - assuming how title was held. there are a few other relatives that may be entitled, but it basically has to do with someone dying, and having qualified relatives inheriting the property. if "qualified" they receive a step-up in basis of the fair market valueof the asset at the time of death.

[anteater]

Originally Posted by fzanka1130

....I'm not sure what your qualifications are...but they conflict with a licensed trust attorney and CPA...

Perhaps I missed something in your posts, but I don't think that anything we have said conflicts with what your CPA has said. To recap:

1) When the property was gifted to you, your basis in the asset remains the same as your mother's.

2) Gift tax reporting is based upon the fair market value of the asset when it was gifted. As the donee, you don't have any liability regarding gift tax.

3) If you sell the property, the difference between the cost basis and the net proceeds could be subject to capital gains tax. If you owned and used the property as your primary residence for 2 of the last 5 years, the first $250,000 of capital gain is not subject to tax.

4) You need to confer with your CPA about how the basis may have been stepped up when your other parent passed away. The basis may already be high enough that we are going round and round here on theoreticals.

TrustUser: a step-up in basis generally occurs when one spouse dies, or when both parents die - assuming how title was held. there are a few other relatives that may be entitled, but it basically has to do with someone dying, and having qualified relatives inheriting the property. if "qualified" they receive a step-up in basis of the fair market valueof the asset at the time of death.

Trustuser - I don't know where you are coming up with this about step up only applying to "qualified relatives." As a shorthand, we usually refer to "[insert name here]'s cost basis." But, more correctly, it is the asset itself that has the cost basis. When an owner passes away, the asset receives a step up to fair market value on the day of death. It doesn't matter who inherits it. It could be that nice host at Denny's that always reserved the window booth with a view for the deceased.

[FlyingRon]

Originally Posted by fzanka1130

Ron,
...and dont F-in call me stupid...you know nothing about me or my situation

The fact that you resort to profanity abreviated or otherwise does nothing to indicate yoiur intelligence.

You're being very dodgy in the information you provided so how are we supposed to guess what you're talking about. Who's in vivo trust was this? You say it was a living trust. Was it your dad's? Who the trustees are doesn't have any bearing on who's trust it is.

Tone down the attitude. Everybody who posts here is a volunteer and doesn't appreciate being insulted when we try to help.

If it isn't your mother's in vivo trust, then there's no gift tax issue at all with respect to your mother. There may have been an estate issue over whoever's trust it was to start with.

None of this changes the statements on capital gains. Capital gains get stepped up only at death not at the time of transfer! If the property was in your father's in vivo trust, then it gets stepped up based on his death NOT when you had it QC'd to you.

[fzanka1130]

Anteater - thanks for your inputs. Just to clarify...
1) The Trust was an in vivos trust that my father and mother created. They put title to the property and most of thier assets into the this Trust.

2) My mother became the sole Trustee upon my fathers death.(2000)

3) I was named as a Co-Trustee in 2006.

3) The Trust quitclaimed the property to me and my mother resigned from the Trust (2006). (Property value $380k-$400k according to realtors)

4) I took the property out of the Trust (2008). It is still out of the Trust.

5) The fair market value of the property in 2008 was approximately $580k (according to realtors).

6) The current fair market value approximately $400-420k.

7) Purpose of selling to pay for mothers Alzhiemers care.

8) Does it make any difference at this point to put the property back in the Trust? ....my current combined fed/state tax rate is approximately 20% according to CPA

Originally Posted by anteater

Perhaps I missed something in your posts, but I don't think that anything we have said conflicts with what your CPA has said. To recap:

1) When the property was gifted to you, your basis in the asset remains the same as your mother's.

2) Gift tax reporting is based upon the fair market value of the asset when it was gifted. As the donee, you don't have any liability regarding gift tax.

3) If you sell the property, the difference between the cost basis and the net proceeds could be subject to capital gains tax. If you owned and used the property as your primary residence for 2 of the last 5 years, the first $250,000 of capital gain is not subject to tax.

4) You need to confer with your CPA about how the basis may have been stepped up when your other parent passed away. The basis may already be high enough that we are going round and round here on theoreticals.



Trustuser - I don't know where you are coming up with this about step up only applying to "qualified relatives." As a shorthand, we usually refer to "[insert name here]'s cost basis." But, more correctly, it is the asset itself that has the cost basis. When an owner passes away, the asset receives a step up to fair market value on the day of death. It doesn't matter who inherits it. It could be that nice host at Denny's that always reserved the window booth with a view for the deceased.

[TrustUser]

hi anteater,

i guess being highly sick with the flu confused some of my brain cells - LOL. worst case i ever had, in terms of getting over it, and being weakened from it.

in california, we have a "relative's law", which allows us to keep the same property tax basis when we inherit property.

for example, if i die, and give one half of a house to my child, and the other half to my friend - my child is able to keep my tax rate, while the friend ends up having the property re-assessed at its current value, and pays taxes based on that current value.

the way property values are in california, it can make a lot of difference. people own houses worth a half a million or more, but spent $17,000 for it. i think it was 78 or so when the famous jarvis bill came into being, limiting property tax to 1% of its value. and more importantly, limiting the raise in assessment value to 2%.

but when the property sells, the state is able to begin the assessment value at its fair market value.

[anteater]

Originally Posted by TrustUser

hi anteater,

i guess being highly sick with the flu confused some of my brain cells - LOL. worst case i ever had, in terms of getting over it, and being weakened from it.

in california, we have a "relative's law", which allows us to keep the same property tax basis when we inherit property.

Understand. Too many bases floating around.