Trust Questions

[hendrce8]

What is the name of your state? PA

My parents are considering putting their house and land into an irrevocable trust with myself and my siblings as beneficiaries. I was wondering:

1. Will they have to pay gift tax on the value of the farm when they put in in the trust?
2. Will we have to pay inheretance tax when the trust terminates?
3. Would we get it at the tax basis of the price they paid for it, or the value when it was put into trust?

Currently the farm is in a revocable trust, and they might just leave it like that. I would like to repeat questions 2 and 3 for if they were to pass away while the farm is still in a revocable trust.

Thank you for your help!

 

[curb1]

Just wondering what their reasons for switching to an irrevocable trust, from a revocable trust?

The basis of their assets will be the value/stepped up basis at the time of their death.

 

[hendrce8]

In case they have to go on medicade before the end of their life, they want to have to farm already essentially transferred to us. They still have control of the property as long as it's in a revocable trust, right?

 

[seniorjudge]

Q: They still have control of the property as long as it's in a revocable trust, right?

A: Yes.

 

[curb1]

So basically this is a plan to transfer medical responsibilities to the government, even though they might have assets to pay some of their own costs?

You are entering a dicey situation. The government has "look back" powers and laws to prevent manipulation of what you are attempting. Professional help would be advisable if you pursue this course.

What amounts are you talking about? What reason do you feel the assets are in danger of being lost?

 

[tranquility]

The terms revocable and irrevocable are fairly blunt to describe a rich assortment of possibilities. However, I'm going to assume some things in the answer.

1. Maybe. There is a present gift of the land or things titled into the trust. If the value puts the parent's past their lifetime exclusion (Currently $1,000,000) there would be a tax due.

2. No. There is a present gift to the beneficiaries. While there may be a tax on the profits of the trust, the distributions are usually not taxed. This can substantively change depending on the specific facts, but you will not be taxed on the gifted portion.

3. The basis would be the basis of the donor, plus and gift tax paid. There would not be a step up on death as the property would not have been transferred because of the death of the owner.

I see with later postings it is not entirely clear what the type of trust is. I suggest people doing medicare planning see an attorney with experience in such matters. Many times the goals can be accomplished, but things must be done right.

 

[hendrce8]

Thank you for your replies, everyone.

My parents have enough money to pay for their own medical care for their entire lives, unless one or both of them has to enter a nursing home for years. We are aware of the look back period, which is why they want to take care of this now. My parents just want to be certain that the house my siblings and I grew up in stays in the family.

I don't know the current value of the farm, it hasn't been appraised since they bought it for $20,000 35 years ago. It has probably gone up in value a bit, which is why tax basis is at least a partial consideration.

I have one question I am still unclear on: The farm is currently in a revocable trust. If we leave things as they are, what will the basis be when the farm passes to us?

Thanks.

 

[tranquility]

Then it will have passed to you in a way where you will get the step-up in basis. (FMV at time of death.)

 

[xylene]

Is your parents farm literally a farm - ie generates a substantial farm income stream?

If it is consider the options you have with the farm as a business entity.

There are experts who can help in this area. (Land rich farmer) Farm succession and estate planinng for land rich estates.

 

[hendrce8]

tranquility- thank you.

xylene- it is a farm in the sense that it has a barn and a few other outbuildings, but it hasn't been a working farm for 20 years.

 

[curb1]

hendrce8,
The basis will be the value as of the date of their passing. It is a true gift by the IRS. All of the gain in value will become tax free at that date. That is why one of my first questions, as to why it is a problem to just wait until that time? Tax wise, it is very advantageous.