John Bullis: Developing trust in changing your trust

Well it happened again. Some good folks decided they would change what’s titled in the name of their irrevocable (fixed-not a grantor) trust. They wanted only a couple of their children to benefit from the eventual sale of their home in Carson City. Their irrevocable trust only named two of their three children as beneficiaries. So, without talking to their attorney or CPA, they changed the title on the home to the irrevocable trust.

They purchased the home many years ago. Their cost, plus improvements and selling costs will be much less than the expected selling price (resulting in a gain of maybe $300,000).

Putting assets into that trust isn’t a taxable event. The cost (tax basis) just transfers to the irrevocable trust. When that trust sells the item, it has taxable gain or loss. The problem is if the trust owns their home and sells it, the trust will have tax to pay on the gain.

On the other hand, if the home is owned by the individuals, since it was their principal personal residence that had never been depreciated (used for rental or business), the gain on sale of that home will qualify for special tax free treatment. They met the rule of owning and occupying the home for at least two of the five years before sale. So, up to $500,000 of profit wouldn’t be taxed — if it was sold by the individuals.

To summarize, if their irrevocable trust sells the home, a tax will be paid on the gain. But, if the individuals sell the home, up to $500,000 of profit is tax free.

Now, they understand how important it is to talk with their attorney and/or CPA before doing major actions such as changing the ownership of their home to their irrevocable trust.

Their attorney is correcting the mistake and getting the title to the home changed back to individual names. There was no intent to contribute the home to the trust. The intent was to be sure the sale proceeds was distributed someday to the two of three beneficiaries.

Now, when the home is sold by the individuals at a gain, they won’t have gain being taxed. They can then contribute the proceeds (or any part of it they choose) to the irrevocable trust and their goals will be met.

Most trusts are “grantor” trusts that don’t pose a tax problem on sale of home or other assets. For tax purposes, it’s treated as if the individuals owned the asset.

It’s best to meet with your advisors before you take significant actions.

Did you hear “Even a short pencil is more reliable than the longest memory.”

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.