If you haven’t figured it out yet, the Internal Revenue Service and the federal government are working hard to get every red cent they can from you. And now, thanks to a new IRS ruling, they could even get your kids’ inheritance.
If you don’t know much about estate planning and such, you likely understand that as Americans age, most of us rely on government-paid programs like Medicaid to fund things like long-term care or nursing home costs. But in order to receive those federal benefits, you can’t have a ton of wealth just sitting around.
Most states require that you spend that wealth down quite substantially, meaning that any money you had planned on leaving to your children or other beneficiaries is gone, including the family home. Fortunately, there is a bit of a loophole that many choose to participate in.
It’s called an irrevocable trust and essentially designates that certain sums, and possibly the value of a home, are held to be passed on to children.
These trusts are also tax-free for the most part. So when a home is sold after death, its full value is given to the beneficiaries rather than some ridiculous amount taken for capital gains tax. The bureaucratic jargon for this lack of taxes is called a “step-up in basis.”
But, thanks to Biden’s IRS, these trusts might not be so beneficial anymore.
According to the ruling, property held in trusts will not be included in that step-up in basis, meaning that capital gains taxes, such as estate taxes, can and will be taken, often reducing the amount left to beneficiaries by more than half.
As Kiplinger wrote, it’s a move that “is likely meant to make sure that as many estates as possible become subject to paying estate taxes.”
However, the site also noted a few moves estate planners can make to counter this. So if you have an estate or are looking to set up one, get a financial planner who knows all the ins and outs involved.