When a Brooklyn family sits at my conference table and announces they want to sign their brownstone over to their children to “get it out of their name,” I usually have to halt the meeting. The story is common. They bought the property in 1982 for $85,000. Today, it appraises at $3.2 million. If they execute a simple deed transfer to protect the asset, they are not just giving their children a house—they are handing them a dormant tax bomb.
I must be honest about what the law can and cannot do. A standard trust does not magically erase capital gains tax if you decide to sell a vacation home or a stock portfolio during your lifetime and pocket the cash. However, the deliberate use of specific trust structures profoundly alters how, when, and whether those taxes are paid. If you simply deed an appreciated asset to your children while you are alive, they inherit your original purchase price—your tax basis. When those children eventually sell the property, they will face devastating capital gains taxes on decades of appreciation.
The Revocable Trust and the Step-Up in Basis
We prevent this massive tax liability by combining a fundamental principle of tax law with prudent trust planning. If you retain the property until death, the federal tax code allows for a “step-up in basis.” The property’s tax value resets to its fair market value on your date of death. In the case of the Brooklyn brownstone, the $3.1 million in phantom profit simply vanishes for tax purposes.
A standard revocable living trust is the ideal custodian for this strategy. By placing the real estate into a revocable trust, you maintain total control over the asset during your lifetime. The trust allows your family to bypass the public, time-consuming process of Surrogate’s Court entirely upon your passing, while perfectly preserving that critical step-up in basis for your children. They inherit the property at its current market value. If they sell it the next day, they owe zero capital gains tax.
Irrevocable Trusts and the Primary Residence Exclusion
The conversation shifts when a family requires asset protection. Many older clients worry that placing a home in an irrevocable Medicaid Asset Protection Trust means losing their ability to avoid capital gains tax if the house is sold while they are still living. They fear that because the trust now legally owns the home, they have forfeited their personal tax exemptions.
This is where the distinction between estate law and tax law becomes vital. When we draft these instruments, we structure them specifically as “grantor trusts” for income tax purposes. Under New York law—specifically EPTL § 11-1.1—a trustee possesses the statutory authority to manage and sell real property held in the trust. If your trustee decides to sell the brownstone while you are still alive to downsize or fund your care, the IRS still considers you the owner for income tax purposes.
Because of this grantor trust status, you can still claim the primary residence capital gains exclusion—up to $250,000 for an individual, or $500,000 for a married couple—even though the house is legally owned by the trust. The remaining proceeds from the sale stay protected within the trust, fulfilling the trustee fiduciary duty to preserve the principal for your future care and your eventual heirs.
Deliberate Deferral with Charitable Remainder Trusts
For high-net-worth individuals, executives, or business owners looking to liquidate highly appreciated stock or a privately held company, we look beyond the standard living trust. We use tools designed for deliberate tax deferral, such as a Charitable Remainder Trust.
When you hold a highly concentrated, appreciated position, selling it outright triggers an immediate and severe capital gains tax hit. This significantly reduces the capital you have available to reinvest. By transferring that appreciated stock into a Charitable Remainder Trust, the trustee can sell the asset without triggering any immediate capital gains tax because the trust itself is tax-exempt.
The full, untaxed proceeds can then be reinvested to generate a steady income stream for you during your lifetime or for a specified term of years. You only pay tax on the income as it is distributed to you, effectively spreading the tax liability over decades. At the end of the term, the remainder passes to a designated charity. It is a highly effective way to diversify a concentrated portfolio, secure lifetime income, and manage immediate tax liabilities.
The Reality of Trust Tax Brackets
There is a dangerous misconception that moving investments into any trust automatically shields the gains from the IRS. In reality, if an irrevocable, non-grantor trust sells an appreciated asset and retains the proceeds, the trust itself must pay the capital gains tax.
Trusts are subject to their own tax brackets, and those brackets are notoriously compressed. For 2024, a non-grantor trust reaches the highest federal income tax bracket at just $15,200 of income—a fraction of the threshold required for an individual taxpayer. Shifting assets into a complex trust without a clear understanding of these compressed brackets can result in higher taxes, not lower.
This is why we frame our work as generational wealth protection, not just a pile of legal paperwork. Stewardship.
Stewardship requires looking at the entire board—the nature of the asset, your timeline, your family’s needs, and the inevitable interaction between state property laws and federal tax codes. Protecting your legacy means understanding exactly how the IRS will treat your life’s work when it passes to the next generation.
Do not wait until you are preparing to sell a major asset to discover how it will be taxed. Schedule a basis review of your existing trust documents to confirm your tax step-up provisions are properly aligned with your current financial reality.
