For many families, a home or other real property is one of the most valuable assets they will pass down to the next generation. Deciding how to transfer that property to loved ones is an important part of estate planning. One of the most effective tools for doing so is a revocable living trust. Not only does this avoid probate, but it also allows your family member to receive a powerful tax benefit: a step-up in basis.
What Is a Step-Up in Basis?
When you purchase real estate, the price you paid becomes your “tax basis.” Over time, as the property appreciates, the difference between the basis and the fair market value represents taxable gain if the property is sold.
If you simply gift property to a child during your lifetime, your original tax basis transfers with it. This means if they later sell the property, they could face significant capital gains tax on all the appreciation since the time you first bought it.
However, if you leave the property to them through inheritance—such as by placing it in a revocable living trust—the tax rules change. At your death, the property receives a step-up in basis to its fair market value as of that date.
Why Is This So Valuable?
Let’s consider an example:
You bought a house 30 years ago for $100,000.
Today, the home is worth $600,000.
If you gift it outright during your lifetime, your child’s tax basis remains $100,000. If they sell, they may owe capital gains tax on $500,000 of appreciation.
But if the property passes through your revocable living trust at your death, the basis steps up to $600,000. If your child sells the home soon after, there could be little or no capital gains tax owed.
This step-up can save your family tens or even hundreds of thousands of dollars in taxes.
Why Use a Revocable Living Trust?
While a step-up in basis is available whether assets pass through a will or a trust, a revocable living trust has additional benefits:
Avoids probate – Probate can be time-consuming, public, and costly. Property in a trust passes directly to beneficiaries without court involvement.
Keeps matters private – Unlike a will, a trust is not part of the public record.
Provides flexibility and control – You can change the trust at any time during your lifetime, while ensuring clear instructions for distribution after your passing.
Streamlines administration – Your successor trustee can manage and distribute assets quickly and efficiently.
Final Thoughts
Leaving real property to a loved one through a revocable living trust can provide peace of mind, simplify the transfer process, and significantly reduce potential tax burdens. The step-up in basis is a key advantage that makes inheritance far more favorable than lifetime gifting in many cases.
If you own real estate and want to ensure it benefits your family as much as possible, contact Surratt Law Practice to help with your estate planning needs. Proper planning today can mean substantial savings and a smoother transition for your loved ones tomorrow.