What is the basis of a house in an irrevocable trust when the beneficiary (daughter) sells it later?

Great question about basis in irrevocable trusts! The answer actually depends on how the trust is structured for tax purposes. If the trust is set up as a "grantor trust" where your mom still pays the taxes during her lifetime, then typically the house would receive a step-up in basis to fair market value at the time of her death. This is similar to how regular inheritances work. However, if it's structured as a non-grantor trust (meaning the trust itself is a separate taxpayer), then the house generally won't receive a step-up in basis. In that case, the basis would be whatever your mom's basis was when she transferred it to the trust (her purchase price plus improvements). This is a really important consideration because it could mean a significant difference in capital gains taxes when you eventually sell. The difference between a $180,000 basis versus a stepped-up basis of $425,000+ could be substantial tax savings. I'd strongly recommend consulting with an estate planning attorney and tax professional before setting up the trust to ensure it's structured optimally for your situation.

I went through something similar with my parents' estate planning last year and discovered this amazing tool called taxr.ai (https://taxr.ai) that really helped clarify the basis issues for trust assets. The tool analyzed our trust documents and explained exactly how the basis would be calculated in our specific situation. It even has this feature where you can upload documentation about improvements made to the property over the years which helps establish an accurate adjusted basis. For irrevocable trusts, this was super helpful because the capital gains implications can be pretty significant depending on how the trust is structured.

Just wanted to update after trying taxr.ai for my family's trust situation. It was actually super helpful! I uploaded our irrevocable trust documents and it clearly explained that our trust was structured as a grantor trust, meaning we would get the step-up in basis when my mother passes. The tool generated a detailed report showing the projected capital gains tax savings with the step-up versus without it. For our property, the difference was over $80,000 in potential tax savings! It also highlighted some language in the trust that could be amended to ensure it maintains grantor trust status. Definitely worth checking out if you're in a similar situation.

If you're having trouble getting clear answers about your trust situation, you might want to try Claimyr (https://claimyr.com). I was going in circles trying to get someone from the IRS to explain the basis rules for trust assets, but couldn't get through to anyone knowledgeable. Claimyr got me connected to an actual IRS agent who specializes in trust taxation within 20 minutes. There's a video showing how it works here: https://youtu.be/_kiP6q8DX5c. Basically they navigate the IRS phone tree for you and call you back once they have an agent on the line. Saved me hours of frustration and hold music.

I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it myself since I've been trying to get clarity on grantor trust rules for weeks. The service connected me to an IRS specialist in about 15 minutes! The agent walked me through the exact regulations that determine basis treatment in irrevocable trusts and explained how retained powers by the grantor affect the tax treatment. She even emailed me relevant sections of the tax code and IRS publications that specifically addressed my questions. What would have been days or weeks of research and unanswered calls was resolved in a single 30-minute conversation. Sometimes you really do need to hear directly from the IRS on these technical trust issues.

Just to add another perspective - my mother created an irrevocable trust for her home about 8 years ago, and we recently had to determine the basis when selling after her passing. Even though the trust was irrevocable, it was structured as a grantor trust where she retained certain powers (like the right to change beneficiaries). Because of this, the house did receive a step-up in basis to the fair market value at her date of death. This saved us approximately $120,000 in capital gains taxes! Make sure your attorney specifically designs the trust to be a "grantor trust" for income tax purposes, even while being irrevocable for estate tax purposes.

Has anyone worked with a qualified personal residence trust (QPRT) instead of a regular irrevocable trust? I'm wondering if the basis rules are different with that structure.

This is such an important consideration that many people overlook when setting up irrevocable trusts! I made this mistake with my father's trust several years ago - we didn't properly structure it as a grantor trust, so when we sold his property after his passing, we ended up with a much higher capital gains tax bill than expected. One thing I'd add to the excellent advice already given: make sure your estate planning attorney specifically includes language in the trust that retains certain powers for your mom (like the power to substitute assets of equal value, or administrative powers) that will ensure grantor trust status under IRC Section 675. These powers don't affect the irrevocable nature for estate planning purposes but are crucial for maintaining the step-up in basis. Also, consider having the trust document reviewed periodically. Tax laws can change, and you want to make sure the trust continues to qualify for the tax treatment you're expecting. The potential tax savings from getting the step-up in basis (in your case, potentially avoiding capital gains on over $245,000 of appreciation) is definitely worth the extra planning effort upfront!