Mom put her home in a family trust. Do we have to pay capital gains tax once the house sells?

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Caregiver Question

"Mom put her house in a family trust. Now that mom has died and is no longer the trustee of the family trust, how do we, the 4 heirs, sell the home? Do we pay capital gains taxes on our part once the house sells?"

Expert Answer

Who is/are the successor trustee(s) for your mom’s family trust? The successor trustee is the person(s) who will have authority to convey ownership of trust property.

You mentioned that your mom was the trustee during her lifetime. You will want to speak with a probate lawyer or estate lawyer and your tax accountant (CPA) to review the trust document. This will help you better understand the purposes your mom had in mind when she signed the trust document and what the estate settlement process will entail.

If the trust was revocable (a revocable living trust) and intended simply as a way to avoid probate, your attorney and accountant will tell you that she still owned the real estate at death, so there will be a “step up in basis” for you and the other beneficiaries. This means (under current tax law) that you get a free pass on any capital gains on the increased value of the property.

If the trust was irrevocable and the house was transferred as a “present interest” gift that your mom gave away while she was alive, then the attorney and accountant will tell you more about capital gains.

Even irrevocable trusts provide a “step up in basis” if they include clauses that fit the “Grantor Trust Rules.” The IRS considers the property owned in a Grantor Trust to be the property of the Grantor, and (for tax purposes) that would keep ownership with the Grantor right up until their time of death.

So, your liability for capital gains tax depends on the terms of the trust. Now is the time to find out how the trust was written before you decide what to do with the property.

For more information on these matters, see Estate Planning and the Taxation of Capital Gains.

John L. Roberts, J.D., is an Elder Law Attorney serving clients in Hampden County, MA. After practicing for 15 years, he confronted the challenges of family caregiving when his own father developed dementia. The experience transformed his practice, enabling him to help clients who are family caregivers from a place of true understanding.

Law Office of John L. Roberts

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