Hello, when my mom passed away in 2014, my grandmother's house (which mom inherited in 2011), went into an Irrevocable bypass trust with income for the benefit of my dad, but listing me as the beneficiary. We turned the home into a rental home. My Dad recently passed away (August, 2020) and I need to figure out the next steps with this house. I want to keep it and rent it out still. Eventually I'd like one or both of my children to inherit the home.
What are my options and the tax ramifications of each option? Here's how I see it...
1. Keep the home in the irrevocable bypass trust "forever." If I do this then each year I will have to move the income from the rental home to me to put on my taxes. I will need to complete a 1041 each year for the trust. If I do it this way then do I never need another grant deed? It would always just stay the same but the beneficiaries would change?? The cons that I see to keeping it in the bypass trust are having to complete the 1041 and not getting a step up in basis when I pass it on to my kids someday. The pros that I see are that since the irrevocable trust owns the house it'll be easier for my kids someday to "joint own" it - or at least jointly benefit from the rental income. It would be protected from their assets if either of my kids were to be divorced... and if it passes down to their kids it would be much easier, I'd think, for the irrevocable trust to continue to own the house for the benefit of all the grandkids as beneficiaries. But then if one of the grandkids wanted to sell the house they probably couldn't do so without all grandkids agreeing, right? And can I be the trustee of the irrevocable trust as well as the beneficiary? I'm meeting with the attorney who created the irrevocable trust tomorrow so I'm hoping he can offer some insight on these questions. Maybe the grant deed would have to change every time there was a trustee change?
2. From what I read I can also pull the house out of the irrevocable trust and create my own Revocable Trust with the house and other assets. Pro's would be not having to do a 1041 and house would "step up" in basis when I died. Cons - when I die my two kids (both in their 20's) would be listed as joint owners on the deed. And then if one of them dies then their kids would be added on and there would be more and more owners of the house which could get very messy.
3. Just put the house in my name and let it go through probate to my kids someday. Either way I'm paying to go through probate or paying for an attorney to draft another trust....
Another critical piece of information... this house is in California. As long as we pass the house from parent to child we maintain the original tax basis (thanks to Proposition 13). However, if Proposition 19 passes in November then the next time it passes hands it will be taxed at present value.
Thanks for your help!!
