Ask the Expert: How an irrevocable trust affects house sale
In a recent column you wrote about people who are selling a house inherited from their parent who had put her kids on the deed but kept a life estate for herself. Our mom has kept a life estate in her house, but the house is in an irrevocable trust. No individual persons are named on the deed. In the earlier column, you wrote that a house in which the decedent retained a life estate is inherited at its market value. Does that also apply when the house is owned by an irrevocable trust?
Yes.
Your mother's life estate gives her a lifetime right to live in the house. That’s why the full value of the house will be included in her estate when she dies. As a result, her heirs will inherit it at its market value at that time.
In fact, this would be true even if your mother hadn’t formally reserved a life estate, provided she continued to live in the house after it was transferred to the trust, says Eric Kramer, a Uniondale estate lawyer.
"This is also true with respect to stocks and bonds," he adds. "If Mom gives stocks and bonds to the kids with the understanding that she'd get them back should she need them, they'll be included in her estate and her kids will inherit them at their market value."
(Note that the rules are different for a no-strings gift. If I give you a stock outright, when you sell it, you're taxed on the increase in its value since I originally bought it. In other words, you're taxed exactly as I would have been.)
The bottom line
A house in which the decedent formally or implicitly retained a life estate is inherited at its market value.
