Mini Case Study: Tax Planning for Inherited Property
This week, we helped one of our executive clients in Eagle, Idaho save over $300,000 in taxes.
Most people know what a CPA does, what an attorney does, and what an investment advisor does. But when you have an important decision to make with tax, legal, and investment ramifications – who do you turn to for advice? For higher net worth ($5M+) families, this is a common occurrence.
Thus, the need for a Wealth Manager.
A wealth manager connects these three areas to build creative solutions, taking the hassle of managing multiple advisors completely off the family’s shoulders. Allowing them instead to focus on what they enjoy the most (running their business, spending time with family, traveling).
A recent example I dealt with ended up saving our client (who we will call Theresa) over $300,000 in taxes. Here’s what that looked like:
Theresa’s mom passed away about a year ago, leaving significant assets to her 4 daughters. One of those assets was a house in New York worth over $20M.
Normally when someone dies and their kids inherit their assets, those assets receive what’s called a step-up in basis, which resets the tax basis to the date of the person’s death. Meaning you could inherit that $20M home and sell it the next day, paying $0 in capital gains taxes.
However, in this case, the home was held in 6 different trusts, 4 of which were irrevocable prior to the mom’s passing.
In most (but not all) cases, an irrevocable trust does not receive a step up in basis at death. Which means if that $20M home were to be sold, there would be significant capital gains taxes paid by the 4 daughters.
The first thing we did was diagram the situation, so Theresa could understand at a very high level what we were looking at:
$20M home split 4 ways – so $5M each.
75% of that home was held in 2 revocable living trusts, which do receive a step up in basis. So, this would be $3.75M tax free to our client upon sale.
25% of the home was held in 4 different irrevocable trusts, one of which is for her benefit exclusively.
That trust has a very low cost basis, which means a sale will trigger a $1M capital gain for tax purposes. All in, we can assume that would equate to roughly $300k in taxes.
Knowing that Theresa’s daughter was living in NYC and renting, we asked if she had any interest in doing what’s called a 1031 exchange. A 1031 exchange would allow her to sell her 25% interest in the home and immediately use the funds to purchase a condo, where her daughter could live and pay rent. Before recommending this, we brought in a 1031 guru from our network and had him opine explicitly on how to do this without crossing any ‘self-dealing’ lines with the IRS.
Fast forward to today, the house has been sold, and $3.75M was received tax-free and invested into a balanced portfolio under our management. The other $1.25M was used to purchase a condo just outside NYC where Theresa’s daughter is now living and paying her fair-market rent.
Throughout the process, we coordinated with the CPA, the estate planning attorney for the deceased, the 1031 exchange guru/tax attorney, the realtors for both transactions, and the title company. All Theresa had to do was tell us her goals, and look for a condo that she would want to own (and that her daughter would want to rent). We handled the rest.
Send me an email (rob@swrpteam.com) or book a time on my calendar (https://calendly.com/rob_summit-wealth-calendar) if you’re dealing with a similar situation and need a trusted Advisor that can help.
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.
