Assets that are conveyed via a revocable living trust get a step up in basis when they are distributed to beneficiaries upon the grantor's death. The step up is to the current market value at the date of death, greatly reducing the capital gains tax burden. A primary disadvantage of a revocable trust is that, unlike an irrevocable trust, it does not protect assets from creditors or lawsuits. But that was not a likely scenario in this case.
Was it difficult to convince the clients of this maneuver? "Not at all," replied Podnos, who is the author of "Building and Preserving Your Wealth." "The son especially understood the significant tax savings."
Maybe it helped, too, that Podnos is a lieutenant colonel in the Air Force reserve. In any case, within a few months the transfer was done. The estimated tax savings for the client was more than $100,000.
Moreover, it was a simple transfer, Podnos noted, with no downside tax implications. "The client was both the sole trustee and the sole beneficiary. No taxes are due on moving money as such," he said. The client could distribute the stock out of the late wife's irrevocable trust to himself and simultaneously deposit it into his revocable trust account.
"It was all after-tax funds," Podnos continued. "In fact, by doing so, he also lowered his income tax bill, since irrevocable trust income brackets climb quickly. Once he had the money in his own trust, he paid at his lower rate."