A financial strategy used by wealthy taxpayers to pass their assets on to their children, instead of throwing them in the lap of a nursing home has now become potentially less attractive.
The site noted that as Americans age, they often spend their final years in a long-term care home or other facility and rely upon funding from Medicaid or another government program to pay the costs of that care.
Most states have rules that say individuals must spend down the wealth they have amassed over their lives as a condition of getting Medicaid or another government-funded program to pay the bills.
That means that money or the value of a home an American wanted to go to a child is gone, leading Americans to set up what are called irrevocable trusts to pass their assets along to the people to whom they want them to go.
The new IRS ruling is aimed at those trusts.
In breaking down tax-speak into layman’s language, the U.K. Daily Mail explained that a second purpose of an irrevocable trust is to avoid estate taxes.
The way it works is that an individual puts assets into the trust, such as a house. If a homeowner who bought a house for $150,000 dies and it sells for $300,000, there is a tax on that capital gain of $150,000.
But if the house was put into an irrevocable trust, there is no capital gains tax because of a bit of bureaucratic jargon called a “step-up in basis.” The English translation of that means that the trust, when it sells the house, pays no capital gains tax because, for tax purposes, it received the house at its current value.
That was the old days.