Reed: Preserving homestead exemption and stepped-up basis with revocable trusts

Sandra W. Reed

Jeremy, a widower, wants to avoid probate of his estate. He understands that probate in Texas is relatively inexpensive and is simplified if his will calls for an independent administration in which his executor can act without court approval except for obtaining approval of an inventory, appraisement and list of claims.

Sandra Reed

Still, he prefers that his heirs take the property he is leaving them immediately upon his death. Jeremy can achieve his goal with a revocable trust. Jeremy plans to transfer his homestead to the trust. Can he do that without losing the homestead exemption which substantially lowers the property taxes and the stepped-up basis which negates capital gains taxes upon transfer?

What is a revocable trust?

A revocable trust is created through a trust instrument that allows the creator of the trust (the trustor or settlor) to revoke the trust, that is, do away with it, at any time during the settlor’s lifetime. Upon the death of the trustor, the trust becomes irrevocable - that is, it cannot be terminated except by the terms set out in the instrument. In most instances, the person who creates the revocable trust is also the trustee. Generally, the trust will provide an alternate trustee who can take over if the original trustee is no longer capable or choses, for whatever reason, to resign and have the alternate take over.

A qualifying trust retains the homestead exemption

To be a qualifying revocable trust that retains the homestead exemption, the trust must give the beneficiary the right to use and occupy the residence without rent or other charges other than the payment of taxes and other costs set out in the trust document. Jeremy’s trust should so provide.

Revocable trust retains stepped-up basis

The basis in an inherited homestead by will is “stepped up” to the value of the property at the time of the testator’s death rather than the amount originally paid for the property. Jeremy’s revocable trust, being what is called a “grantor trust” will retain the stepped-up basis because he is deemed to be the owner of the property even though it is held in trust.

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives on beautiful Chalk Mountain and can be reached at 254.797.0211; 817.946.2809 or at sreed@kbzlaw.com.