How 453 Trusts Can Help You Manage Inherited Property

A 453 trust is a powerful instrument that may help you manage the tax implications of selling an inherited property. At 453 Trust Powered by Pennington Law, we help individuals explore strategies to defer capital gains taxes and potentially generate and enjoy more of the wealth that their loved ones left them.

Our national practice, led by seasoned professionals, can provide expert advice on estate planning, tax law, asset protection, and financial planning. Unlike other firms that rely on outside professionals to handle various aspects of clients’ cases, our firm offers an integrated program that provides comprehensive service under one roof while complying with IRS rules. Contact us today for an initial case review with a knowledgeable 453 trust lawyer. 

Step-by-Step Guide to Setting Up a 453 Trust for Your Inherited Property

While often referred to as a 453 trust in practice, this strategy involves a deferred sales trust (DST) that utilizes IRC Section 453 installment sale rules. There are several steps to setting up a 453 trust to sell inherited property.

• Create a non-grantor, irrevocable trust. If the property is inherited, note that capital gains taxes may be minimal due to a step-up in basis, which means that inherited property is generally valued for tax purposes at its fair market value on the date of the decedent’s death. This often eliminates or greatly reduces capital gains taxes on inherited property if you immediately sell it.
• Appoint an independent trustee to manage the 453 trust.
• Have the trust purchase the inherited property from you at fair market value through an installment sale and then sell it to a bona fide third-party buyer.

Where do the tax savings come in? In general, 453 trusts allow sellers to defer capital gains taxes by receiving installment payments over time. However, for inherited property, the step-up in basis may not provide additional benefit. Because the sale to the trust is at fair market value, it typically does not trigger gift taxes.

To comply with IRS guidelines for installment sales via a 453 trust:

• The trust must have an independent trustee. The seller cannot control trust investments.
• The trust must sell assets to a bona fide third party. The sale should not be pre-arranged.
• The seller may not monetize the installment payments by pledging or borrowing against them.

Because 453 trusts must be properly structured to comply with tax rules, it’s wise to consult an experienced attorney before selling inherited property.

Why Inherited Property Owners Face Capital Gains Tax Risks 

When you inherit property with a stepped-up basis, capital gains risks typically come into play if the property continues to rise in value after you inherit it. If you decide to sell the appreciated property some time after inheriting it, you may need to pay capital gains tax on the difference between the sale price and the stepped-up basis in the property. 

How a 453 Trust Simplifies Wealth Transfer for Families With Inherited Assets

Family members who inherit assets such as real estate or stocks may want to cash them out so they can use their inherited wealth as they see fit. Selling inherited property immediately after inheritance can minimize tax liabilities due to the heir’s stepped-up basis. However, waiting to sell a property that appreciates could trigger tax obligations that affect the wealth generated from a sale.

Using a 453 trust to sell inherited assets could help manage capital gains taxes and facilitate wealth transfers between generations. Thus, family members do not have to worry about holding onto an asset like a home they do not want to use, but can instead sell that asset and access the wealth it contains.

Estate Planning Advantages of Using a 453 Trust for Inherited Properties

Using a 453 trust to sell inherited properties can also integrate with your existing estate plan. If you pass away while still receiving payments from a 453 trust, your estate may include only the remaining unpaid installment payments, while the assets held in the trust remain separate from your estate.

A 453 trust can also help manage tax liabilities from selling inherited property or other appreciated assets over time, potentially reducing immediate tax burdens and preserving more wealth for the next generation.

Does a 453 Trust Help You Reinvest Proceeds From Inherited Property Tax-Free?

A 453 trust does not allow you to reinvest proceeds completely tax-free. Instead, it is a tax management tool that can be used to reinvest the full sale proceeds from inherited property into various assets, such as insurance or financial products, and can help manage any potential capital gains on future appreciation beyond the stepped-up basis.

The trust can pay you in installments, which may include interest or reinvestment income. You would report this as income and pay applicable income taxes on that amount in that tax year. Alternatively, a 453 trust can retain income earned on reinvested proceeds and pay on that income according to tax rules.

Protect and Grow Your Inherited Wealth With 453 Trust Guidance

Have you inherited property that you’re interested in selling? If so, careful legal and financial planning can help you manage or mitigate the tax bill that the sale would generate. At 453 Trust Powered by Pennington Law, our experienced attorneys and financial advisors can offer potential solutions to help you avoid capital gains taxes on your inheritance. Contact us now for a free consultation with a knowledgeable trust attorney to learn whether this powerful tax tool might be right for you.