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  • Writer's picturePorter DeVries

Understanding the Step-Up in Basis with a Living Trust

When planning your estate, it's crucial to understand the tax implications of passing on assets to your heirs. One powerful tool in estate planning is the living trust, which can help achieve a step-up in basis, potentially saving your heirs significant amounts in capital gains taxes. Here’s how it works:

What is a Step-Up in Basis?

The step-up in basis is a tax provision that adjusts the value of an inherited asset to its fair market value at the time of the original owner's death. This can significantly reduce the capital gains tax burden on the heirs when they eventually sell the asset.

For example, if you purchased a property for $100,000 and its value increased to $300,000 by the time of your death, the basis (or original value for tax purposes) would step up to $300,000. If your heirs sell the property for $310,000, they would only pay capital gains tax on the $10,000 increase in value since your death, rather than on the $210,000 increase since the original purchase.

How Does a Living Trust Work?

A living trust is a legal document that places your assets into a trust for your benefit during your lifetime and specifies how these assets will be distributed after your death. You retain control over the assets in the trust while you are alive, and you can modify or revoke the trust as your circumstances change.

Benefits of a Living Trust for Step-Up in Basis

  1. Avoids Probate: One of the primary benefits of a living trust is that it avoids probate, the often lengthy and costly court process required to settle an estate. This means that your heirs can gain access to your assets more quickly and without the expense of probate proceedings.

  2. Ensures Privacy: Unlike a will, which becomes public record during probate, a living trust remains private. This keeps details of your estate out of the public eye.

  3. Facilitates Step-Up in Basis: Assets placed in a living trust generally qualify for the step-up in basis upon your death. This can be particularly advantageous for highly appreciated assets such as real estate, stocks, and businesses.

  4. Tax Efficiency: By utilizing the step-up in basis, your heirs can minimize their capital gains tax liability when they sell the inherited assets. This tax efficiency can preserve more of your wealth for your loved ones.

Setting Up a Living Trust

Creating a living trust involves several steps:

  1. Consult with an Estate Planning Attorney: Professional advice is essential to ensure your living trust is set up correctly and aligns with your overall estate planning goals.

  2. Draft the Trust Document: This document outlines how your assets will be managed and distributed. You will name a trustee (often yourself during your lifetime) and successor trustees to manage the trust after your death.

  3. Transfer Assets to the Trust: To be effective, the trust must hold your assets. This involves retitling property, bank accounts, and other assets in the name of the trust.

  4. Update Beneficiaries and Titles: Ensure all your beneficiary designations and titles reflect the trust to avoid conflicts or assets being excluded from the trust.

Conclusion

A living trust is a valuable tool in estate planning, offering benefits such as probate avoidance, privacy, and potential tax savings through the step-up in basis. By understanding and utilizing these advantages, you can ensure a smoother transition of your assets to your heirs and minimize their tax burdens. As always, consult with an estate planning professional to tailor a plan that best suits your individual needs and circumstances.

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