Wellthi warriors, gather around for a story more twisty than your last TikTok dance trend. It’s about the tax boogeyman – IRS and its March ruling that has rocked the world of estate planning.
So, you’re thinking, “Trust? Isn’t that what my last ex had issues with?” Nope, not today! We’re talking about irrevocable trusts. These bad boys have been a favorite of families trying to protect their assets and qualify for benefits like Medicaid and VA Aid and Attendance.
Now, imagine your assets as your college GPA. If you pass them on when you’re still kicking (like selling them), you’re taxed based on the difference between the purchase price (freshman year) and selling price (graduation). It’s like going for that Dean’s list but ending up with a wicked hangover and a B- in Spanish.
But, if you pass on assets after your death, they get a step-up in basis. It’s as if your beneficiaries bought the asset at its current market value, not when you first purchased it. This skips any capital gains taxes, leaving your kids to spend their inheritance on something more fun than taxes (like vegan, gluten-free, probiotic donuts).
But how about the assets chilling in your irrevocable trust? They were in a strange limbo, neither with the original buyer nor passed on to beneficiaries. Post-March 2023, the IRS declared these assets won’t get a step-up in basis. This means more taxes for your kids, leaving less money for their avocado toast habit.
Now, if you’re anything like us, you’re wondering, “Why bother with irrevocable trust planning?” Well, remember that friend who convinced you to join that “Tough Mudder” race? It seemed painful at first but ended up saving you from a spin class disaster.
Long-term care can cost up to $10,000 a month, which is more than the entire Friends cast spent on coffee at Central Perk! Programs like Medicaid or VA Aid and Attendance can help, but you need to deplete your assets before qualifying – enter, the irrevocable trust.
The IRS ruling states that only assets not included in your estate for tax purposes at death will lose the step-up. Properly setting up an irrevocable trust can include the assets in the taxable estate at death, meaning no capital gains taxes, no estate taxes, and a tax-free inheritance for your kids!
In short, think of an irrevocable trust like your favorite mystery series: It needs careful planning and a brilliant lawyer to save the day. Remember Tom and Jane? They sold their $250,000 house they bought for $100,000. Without an irrevocable trust, their kids are stuck with capital gains tax on the $150,000 growth. With an irrevocable trust (properly worded, of course), the kids owe nada on capital gains.
So, my Wellthi warriors, strap on your financial battle armor and plan. The world may be complex, but with sound advice and our trusty Wellthi GPT by your side, your financial future can still have more wins than the current world champions. Now, who’s up for a victory dance?
What Is an Irrevocable Trust? (Investopedia)