Estate planning is a complex process, especially when it comes to maximizing tax benefits. One of the key questions many Massachusetts residents have is whether they can benefit from a “step-up in basis” with an irrevocable trust. This technical detail can have significant implications for your estate’s tax liability and your beneficiaries’ inheritance.
At Jordan & White, we understand how overwhelming estate planning can be, especially when terms like “irrevocable trust” are thrown around.
While irrevocable trusts are powerful tools for asset protection and tax planning, the answer to whether you can get a step-up in basis depends on several factors. Let’s take a closer look at how it works in Massachusetts.
Key Distinctions Irrevocable vs. Revocable Trusts
Trusts are a staple of estate planning, and in Massachusetts, both irrevocable and revocable trusts offer a valuable benefit: they allow assets to bypass probate.
This can save your loved ones both time and money after you pass. But what really sets these two types of trusts apart is control.
- Revocable Trusts: With a revocable trust, the grantor retains complete control. You can change, modify, or even revoke the trust during your lifetime. This makes it a flexible option for those who want to keep their options open.
- Irrevocable Trusts: Once established, an irrevocable trust is generally unchangeable. The grantor relinquishes control over the assets, making it an excellent option for asset protection and tax benefits, but with less flexibility.
Both options come with their pros and cons, but let’s focus on how an irrevocable trust can affect taxes and whether you can get a step-up in basis.
Irrevocable Trusts: Asset Protection & Tax Benefits
Irrevocable trusts are a key component of estate planning, especially when you’re looking to safeguard your assets while minimizing tax burdens. In Massachusetts, these trusts offer valuable protection, but they also come with important trade-offs.
Asset Protection
One of the biggest advantages of irrevocable trusts in Massachusetts is their ability to protect your assets from creditors and claims.
This is particularly important for Medicaid planning. Irrevocable trusts are often used to protect your assets from being spent on long-term care costs.
Tax Benefits
Irrevocable trusts also offer significant tax benefits, especially when it comes to reducing estate tax liability.
But here’s where things can get a bit tricky. While irrevocable trusts can help lower estate taxes, not all of them qualify for a step-up in basis.
Types of Irrevocable Trusts in Massachusetts
There are various types of irrevocable trusts used in Massachusetts, each serving different purposes.
Special Needs Trusts
Special needs trusts are designed to preserve a loved one’s eligibility for government benefits while still providing financial support.
These trusts can be a lifeline for families with disabled members, ensuring they receive the care they need without losing crucial benefits.
Medicaid Planning Trusts
Medicaid planning trusts help protect assets from being used for long-term care costs, ensuring that your devisees can still inherit. These trusts are a key tool for shielding your estate from Medicaid estate recovery.
Irrevocable Life Insurance Trusts (ILITs)
ILITs keep life insurance proceeds out of your taxable estate, which can provide a tax-free inheritance to your loved ones. It’s a useful option for those looking to maximize what they leave behind.
Capital Gains Tax & Step-Up in Basis
When we talk about a step-up in basis, it’s essential to understand how it impacts capital gains tax.
Capital Gains Tax
Capital gains tax is the tax on profit from the sale of assets. The larger the appreciation in an asset’s value, the more significant the capital gains tax liability will be when it’s sold.
Step-Up in Basis
A step-up in basis adjusts the value of an inherited asset to its fair market value at the time of death. This can eliminate or drastically reduce the capital gains tax your devisees will need to pay when they sell the asset.
Without a step-up in basis, they’d be on the hook for taxes based on the original purchase price, which could result in a hefty tax bill.
IRS Ruling Impact on Irrevocable Grantor Trusts
Recent IRS rulings have shaken things up for high-net-worth individuals using irrevocable grantor trusts. Assets in these trusts may no longer qualify for a step-up in basis, meaning your devisees could face higher capital gains taxes.
The goal behind this ruling is to increase estate tax revenue, but it creates challenges for those who’ve structured their estate plans around reducing these taxes.
However, it’s important to note that this ruling primarily affects certain types of irrevocable grantor trusts. Not all irrevocable trusts fall under this umbrella.
Irrevocable Trusts for MassHealth Planning
The good news is that irrevocable trusts used for MassHealth planning are generally not affected by the recent IRS ruling.
These trusts still offer the same benefits, including asset protection, probate avoidance, and a step-up in basis for your devisees.
This makes them an excellent option for individuals concerned about long-term care costs and Medicaid estate recovery.
Irrevocable Income-Only Trusts
One concern many people have when setting up an irrevocable trust is losing control over their assets.
That’s where irrevocable income-only trusts come in. These trusts allow you to retain control over investment decisions and asset sales, offering a balance of protection and flexibility.
They also provide creditor protection, tax planning opportunities, and in Massachusetts, a step-up in basis advantage. This option is particularly appealing for those looking to minimize capital gains taxes while protecting assets from Medicaid estate recovery.
Craft a Proper Estate Plan
Irrevocable trusts can be powerful tools for protecting your assets and reducing your tax liability, but they require thoughtful planning. At Jordan & White, we’ll guide you through the complexities, including the recent IRS rulings and how they may affect your estate plan.
Let’s work together to create a plan that protects your assets, minimizes taxes, and ensures your family’s financial future. Reach out today for a free consultation at (978) 744-2811.