What You Should Know if You’re Considering Transferring Property Via a Trust

What is a Step Up in Basis? And Why Should I Consider Transferring Property Via a Trust?

There are number of reasons to create a Trust. Some of them involve avoiding Probate; others may involve avoiding conflict between heirs. However, one that most people don’t think about is avoiding capital gains taxes.

I recently had a client contact me regarding a house that her father had given to her before he passed away. The father was ill and wanted to make sure his daughter received the property. He decided to create a deed and transfer the property via deed. The issue with this type of transfer is the likelihood of capital gains taxes once the daughter sells the property. The father bought the property in the 1970’s for $40,000. The house was now valued at $640.000 and had no mortgage on it. Since the father transferred the property before his death, it is assumed the daughter acquired the property at the “original basis” (original tax basis) of $40,000. When the daughter sells the property, she will owe capital gains taxes on the difference between what her father bought the property for in 1970’s and what she sells it for today. If she sells the property for $640,000, she will be taxed on her gain of $600,000 ($640,000 – $40,000). [Note: There is certain exclusions that might apply in a situation such as this, however that is something your accountant can better advise you on].

A simple way avoid a situation such as this would be to use a Living Trust. If the daughter had acquired the property after the father’s death, via a living trust, she would have inherited it with a “step up in basis”. What this means is that she would have inherited the property at the current value of $640,000 and not the original basis of $40,000. Therefore, when she sells the property for $640,000 she would owe nothing in capital gains, because she would have zero gains.

Speak to a qualified Estate Planning attorney or Tax Specialist to advise you on your individual scenario.

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Kris Mukherji is a Northern California native now practicing law as an estate planning and business attorney at Law Office of Kris Mukherji, APC. Kris moved to San Diego in 2000 to attend the University of California, San Diego where he graduated with a Bachelors in Communication. Kris graduated from law school in 2012 and started his practice. Kris lives his wife and their pet Shih-Tzu Bailey.