Stautz Law

Tag: Income Tax

  • Step Up in Basis Indiana Houses

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    Good morning, folks. It’s Andy Stautz at Stautz Law. I am back for another talk about an estate planning topic. And this topic is step-up in basis for houses. So this is a tax, this is kind of a tax planning topic.  

    Step-up in basis is an important concept to understand in your estate planning because it’s probably the biggest tax effect you’re going to feel, or your heirs are going to feel, really.  

    Other Estate Taxes Not Likely

    As you might know, and as I’ve talked about elsewhere, the current threshold for the federal estate tax is really high. It’s like $15 million under the new law, and that’s per person. So most people just don’t have to worry about a federal estate tax anymore. And Indiana abolished its inheritance tax, getting to be a long time ago now, you know.  

    Planning for Income Taxes

    So for most people, it’s kind of income taxes that they need to worry about, or income taxes for their beneficiaries. And so for a lot of people where the house is kind of one of the big assets in their estate, you’ve got to say, OK, well, what’s the tax consequences for my beneficiaries going to be if you use a transfer on death deed? You know, that’s probably the most common device, or pass it by will, or put it in a trust.  

    And the answer is usually there aren’t huge tax consequences for your heirs. And that’s because the step-up in basis adjusts your basis in the house or in the real property from your basis to whatever the value of the house is at the time of your death.  

    How Step-Up in Basis Works

    It helps to talk about an example. Let’s say you bought a house in 1990 for $100,000, and now it’s worth $400,000. If you were to sell the house right now, you would owe capital gains tax on the $300,000 in capital gains. That’s the $400,000 sale price minus the $100,000 of basis (the amount of money you put in to start with).  

    Now, there is an exemption from capital gains on the sale of primary residences, which is $250,000 per person or $500,000 for couples. So for most ordinary people, selling houses, they don’t actually have to worry about capital gains taxes.  

    But if you’ve held a property for a long time or it’s appreciated a lot, you know, maybe you’re getting kind of close to that, kind of close to that tax hitting. actually coming into play.  

    But the step-up in basis for the house would be if you have a transfer on death deed, you leave the same $400,000 house to your heirs, you die next year, sorry to hear it, your heirs have a $400,000 basis in the house. That means if your heirs inherit the house, it’s worth $400,000, their new basis is $400,000, and they sell it right away, they owe $0 in capital gains taxes, because there’s been no gain since that basis was stepped up, since it increased from your basis of $100,000 to the fair market value of date of death, $400,000.  

    So even if there were no capital gains exemption on the sale of a primary residence, your heirs usually don’t have to deal with capital gains taxes for an immediate sale.

    But the upshot of all of that is the step up in basis means inherited houses, inherited real estate is not going to be a huge tax problem for your heirs if they sell it right away.

    And that’s kind of good for heirs who aren’t planning to live in the house, because to get that exemption from capital gains taxes, they have to live there for at least two years. So for heirs who inherit a property and sell it right away, the step-up in basis means there’s $0 in capital gains taxes owed, and it doesn’t matter that they don’t get the exemption. If they don’t. (Obviously, they can move in and hold it, and that’s a new consideration.)  

    But the upshot of all of that is the step up in basis means inherited houses, inherited real estate is not going to be a huge tax problem for your heirs if they sell it right away.

    Step Up in Basis vs. Lifetime Gifts

    Obviously, if they hold it, different story, and, you know, This is one of the reasons, by the way —and this will be kind of my last topic, we’re coming up on five minutes— One of the reasons you need to think carefully before making a lifetime gift of your house or appreciated real property is because then you won’t get that step up in basis. So if you give the property away during your lifetime, the basis stays with it. But just a traditional transfer on death deed, will, trust you get the step up.  

    Okay, that’s all for today. It’s a complicated topic, obviously, but that specific question comes up enough. I wanted to answer it. I hope it’s been useful as an informational topic.  

    And if you are doing Indiana estate planning and probate, I’ve got offices in Indianapolis and Greenwood, and I’d love to help you out with your case. You’ve got my contact information on the website and here on the end screen, so goodbye for now. 

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  • IRAs and Charitable Trusts: Video Follow-Up

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    Hi, it’s Andy Stautz at Stautz Law.  

    Today is a bit of a follow up video about a text-only post I made earlier, and this one’s about IRAS and Charitable Trusts.

    Did you miss the Charitable Trusts Basics? Go Back and Watch!

    So IRAs, individual retirement accounts: construed broadly to include 401(k)s and Roths. All of these structures. Powerful tax savings vehicles. But eventually the tax deferral has to end. The government’s gonna get its money!  

    And so a common tax problem is for your beneficiaries. If you have a sizable IRA and you don’t spend it while you’re alive, your beneficiaries are going to get a lump sum that they have to take as taxable income fairly quickly. And you know this is in the “good problems to have” category, in that we’re dealing with lots of money and just how much of it goes where: taxes, your beneficiaries, or charity. 

    One clever idea that I want to propose is putting your IRA into a charitable remainder trust. So the idea is you take your IRA, which is tax deferred. (We’re assuming tax deferred.) You put it in a charitable remainder trust. It goes in tax free. So you’re continuing the deferral. That’s great.  

    You set up the charitable trust. Let’s assume it’s a CRUT. You set it up to give an income stream to your beneficiary, just like if they had inherited the IRA directly. But you can use the trust to you know, stage the income over time. And it’s taxable income to your beneficiaries, just like if they’d received the IRA directly, but hopefully you can shape it a little and find some savings there.  

    And then at the end of the trust term the charity gets the remainder, which is hopefully substantial. And if it’s a qualifying charity they get it tax free. So you’ve got infinite tax deferral. At least with regard to that part.  

    So you know potential win-win here: you can save on income taxes, you can keep the tax deferral going, can make a substantial gift to charity. Don’t let the tax tail wag the dog. But if you’re charitably inclined, it can be a great scheme. 

    And that’s kind of one step up in terms of charitable planning over simply gifting appreciated assets. You know you’re gifting appreciated assets. But you’re doing it while still steering some income to a non-charitable beneficiary if that’s something you’re interested in.  

    It’s a fun idea. I’d love to talk about it with you. Obviously it’s got to be tailored to your situation and set up right. So you can book your initial planning meeting online or you can give me a call. And I look forward to working with you soon. 

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  • Charitable Remainder Trusts: The Basics

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    Hi, it’s Andy Stautz with Stautz Law. We’re back talking about basic estate planning techniques. Today, not so basic. We’re talking about charitable remainder trusts.  

    A charitable remainder trust is, as its name suggests, a trust with a charitable purpose. And the remainder part refers to when the charity gets the trust proceeds.  

    So the scheme is the charitable remainder trust is set up once, and the settlor (or grantor) puts a lump sum into the trust. And receives a charitable deduction for part of the value of that lump sum in the year that the trust is made.  

    There’s an upfront contribution to the trust, it’s a one time thing, and then there’s a partial charitable deduction on income taxes. And the formula for that is complicated. But you know, it’s maybe 1/3 of the value of the trust corpus.  

    [O]nce the trust is funded, it then pays out an income stream over the next however many years. And that can be a term of years, you know, 20 years or it can be the lifetime of a beneficiary.  

    The way the income stream is determined changes the flavor of the trust. So you can say the trust is going to pay out $10,000 a year and that way it works like an annuity. And that’s a charitable remainder annuity trust—a CRAT. Or you can say well, the trust is going to pay 5% of its value every year. That makes it a unitrust—a CRUT. In either case, though, you’ve got a beneficiary receiving some income stream from the trust corpus for some period of time. That’s called the lead interest.  

    And then, OK, wait, what about charity? Well, charity gets the remainder interest. The charity gets whatever’s leftover after that income stream (term of years, life of a beneficiary) expires.  

    So that can be a good planning tool for a charitably minded donor. You know you can create this as an inter vivos trust, during life; you can create it as a testamentary trust.  

    But oftentimes the settlor will put assets into the trust to provide for someone else. Maybe an adult child with a creditor problems or other problems . . . To kind of give them that income stream and then whatever leftover to charity. And depending on the performance of the trust that can be a win win.  

    So that’s the basics. And as you can see, it’s a pretty complicated structure. You’re going to want help setting it up there are some IRS rules that I haven’t had time to discuss here about, you know, the amount of payout, the length of the term, you know, make sure it’s set up right so it’s going to qualify for all those tax benefits and going to work like you want.  

    Happy to discuss it with you and personalize it to your situation. I think it’s a fascinating planning tool. So book your initial meeting or give me a call. And I look forward to working with you soon. Thanks and bye!

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  • A Tax Planning Idea for IRAs

    Introduction: Tax Considerations for “Non-Taxable” Estates

    In the estate planning world there’s an informal divide between “taxable” and “non-taxable” estates, where “taxable” means at or near the estate tax deduction amount, a.k.a. the taxable threshold. Well, right now in 2025 that threshold is at $13.99 million per individual, so ~$28 million for a married couple. And Indiana has no state estate or inheritance tax. So “taxable” estates are rare indeed!

    But that doesn’t mean a smaller estate can get away without any tax planning at all. The key point–which is obvious, but obscured by the habitual taxable/non-taxable focus–is that the estate tax isn’t the only tax to consider in the estate planning context. Income tax and capital gains taxes apply to (almost) everybody, and they can be substantial.

    The estate tax isn’t the only tax to consider in the estate planning context!

    So here’s the idea: why not borrow sophisticated planning strategies from the “taxable estate” world and apply them to income tax planning on non-taxable estates?

    Today we’re talking about one possibility:

    IRAs and Income Tax Basics

    IRAs are a whole class of tax-advantaged retirement accounts. In a standard IRA, you get to contribute before-tax dollars in your working years and enjoy tax-free growth of investments in the account. In retirement you take the money out and pay taxes as you withdraw. The “tax deferral” of paying taxes on withdraw, instead of up front or each year, is (usually) a great advantage and lets you accumulate much more in your account than you would otherwise.

    If you don’t use all the money in the account you can leave it to your spouse, or children, or any other beneficiary.

    The “problem” is that your beneficiary has to empty the account, and thus pay taxes, rather quickly–the government doesn’t want people to defer taxes forever!

    If you’re dealing with large sums, say an inherited IRA with $1 million left in it; and a short withdrawal window, like the 10-year rule currently in force for many accounts; then your beneficiary will have substantial income, and substantial income tax, in the withdrawal years.

    IRAs in a Charitable Trust

    What can you do?

    Well, one idea is to put the IRA into a charitable trust. A Charitable Remainder Trust, the most common flavor of which is called a “CRUT” for short, has you put a lump sum into an irrevocable trust. Then for the term of the trust it pays out an annual income stream to a beneficiary. At the end of the trust term, whatever’s left over goes to the charity named in the trust instrument.

    IRAs can go into a CRUT tax-free. So for a charitably-inclined person, leaving an IRA to a CRUT basically lets you:

    1. continue to defer the taxes on the main corpus or “lump sum”;

    2. provide a reliable income stream to a beneficiary of you choosing; and

    3. give the remainder tax-free to a (qualified) charity

    That’s a pretty good deal for the right person. And it’s not some dodgy scheme: the IRS encourages it! There are even sample forms.

    Conclusion

    Now you’ve seen one way that income tax planning can be part of an estate plan. Specifically, we can borrow planning techniques used by “taxable” large estates to save taxes on more typical estates.

    It all comes down to what you need and what works best in your situation. I invite you to call Stautz Law, or book online, and get personalized advice for your situation.

    Want to talk more?

    Book your initial planning meeting with Stautz Law and we’ll discuss your individual needs. No obligation.

    Book Now