Older Couples Selling Their Homes Can Get Major Tax Breaks

Older Couples Selling Their Homes Can Get Major Tax Breaks

Susan recently lost her husband, Carl, and is now a widow. They shared ownership of their home with the right of survivorship. In simpler terms, this means that upon the death of Carl (co-owner), the surviving co-owner (Susan) automatically acquires full possession of the highly appreciated home.

Susan is unsure if she should sell it now and move to where her son lives, wait a few years to sell or stay put, in which case the house would eventually pass to her heirs.

She is curious about the tax consequences of her options. She must first understand the tax breaks available to individuals who sell their primary residences.

Exclusions

The law permits “exclusions” that let sellers avoid paying income taxes on the majority of their profits when they sell their primary residences. The profit exclusions are up to $500K for couples who file jointly, and as much as $250K for individuals. All sellers are liable for gains that exceed $500,000 or $250,00, respectively.

Susan chooses to sell her home.

Can she exclude $500K or $250K? The solution depends on the sale date and whether she marries again. Although no longer married, Susan is still eligible for the $500K as long as she sells within two years of Carl’s passing. If she sells after the two-year window, she is only eligible for $250K.

Susan remarries.

If her new spouse, George, lives in her home as his primary residence for at least two years out of the five years prior to the sale date, the exclusion will revert to $500K again.

Typically, the seller must have owned the home for those two years. George doesn’t fit those criteria. His name doesn’t have to appear on the title.

Additionally, according to the IRS, Susan and George don’t have to be wed for the entire two years prior to the sale date, but they do need to be married, even if their wedding takes place just one day before the transaction.

Susan’s taxable gain might be less than she anticipates even if she doesn’t get remarried and doesn’t sell her home within two years of Carl’s death. It is likely that Susan owes taxes on the gain because her long-term capital gain on the sale of her home exceeds the exclusion limit.

Tax rates for long-term capital gains.

The tax rate is usually 15% for most sales, rising to 20% for many high-income sellers. When combined with the Medicare surtax of up to 3.8% on certain types of income, such as earnings from home sales, it can reach a maximum of 23.8% for people in the top income tax bracket of 37%.

  • State income taxes may also be owed.

Tax Cuts and Jobs Act

State and local income and property tax write-offs were limited by the tax cuts and jobs act to $10,000. Another issue is that if Susan is subject to the alternative minimum tax, she loses any write-offs for state income taxes.

Step-up in basis

The government offers condolence gifts for bereaved people who sell inherited homes, securities, and other assets that have increased in value. According to tax terminology, the basis (the starting point for measuring loss or gain) of inherited assets “steps up” from their initial basis (typically the cost at the time of purchase), to their value on the date of death.

When Susan sells her home after Carl dies, she will gain from a step-up in basis. What if she never sells it? Upon Susan’s death, there’s a second step-up in basis that benefits her living heirs.

Only Carl has a partial interest in the first advancement. His adjusted basis is raised to the value of that half-interest at the time of his death, which is normally equal to half the original purchase price and half the cost of any later house modifications. If the couple had resided in a state with common property, the step-up would apply to the entire basis.

When Susan dies, there is a step-up in her adjustment which was previously increased by the step-up for Carl’s half interest, to the value of the entire house when she dies. When the heir sells it, they are liable for capital gains taxes only on the post-inheritance appreciation.

The bottom line

A sale by her heirs greatly reduces or even eliminates those taxes, in comparison to Susan’s sale of the home, whose value has increased significantly. Susan, as well as those in comparable situations, should consult with a tax and estate planning attorney to be sure they’re choosing the right course of action for their long-term future goals.

 

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How a Trust for Minors Works

How a Trust for Minors Works

A trust for minors is typically established as a strategy to protect assets and distribute property to children without allowing them immediate access to their inheritance. Typically, minor trusts come with instructions that specify when the funds, estate, or other assets may be released to the minor. Trusts for minors are a great approach to guarantee your children’s long-term security and financial future after your passing.

Establishing a trust for a minor serves a number of purposes:

  • Proactively plans for the distribution of finances.
  • Sets up a timeline as to when the beneficiaries will receive the funds.
  • Defines how the funds should be allocated.
  • Addresses the plan of action should the minor pass away.

You have flexibility and choices when creating a trust for a minor. You are free to decide between a living trust and a will. Each brings unique capabilities. You can designate a minor as the beneficiary of money or assets you leave behind, but a provision addressing the minor’s age is required.

If the child is a minor at the time of your passing, the property designated to the minor’s trust will be managed by an adult trustee who will administer the funds on the minor’s behalf. You can choose a trustee or the court will assign one.

You can determine the age that the trust funds become available to the minor for use. For instance, you may feel that a young person lacks the maturity to make good financial decisions. Simply specify the age, and the authority remains with a trustee until the young person reaches the appropriate age.

A trust fund for a minor can be set up to disperse the money in installments rather than having a flat payment. This can be done as a safeguard to make sure that all of the money isn’t spent right away and it may have tax benefits.

You can restrict the trust funds to housing, educational, and medical costs. You can choose to include a secondary beneficiary; maybe a grandchild. You can choose to exclude a person’s access to the inheritance.

You can choose to assign a permanent trustee. Maybe the recipient has a mental or health condition that prohibits the ability to administer the funds on their own. Maybe you are caring for a minor that has special needs that will require medical care throughout life.

As you can see, a Minor Trust offers tremendous flexibility and the structure will impact the lives of the people that you leave behind, and your legacy.

The laws are complex. If you need help creating a Minor Trust or want to discuss your options, contact attorney Chuck Bendig for a consultation.

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How To Divide Possessions Among Heirs

How To Divide Possessions Among Heirs

The death of a family member can bring families together, sharing in their grief, but that’s not always the case. For example, the daughter of the deceased may announce that her mom promised her the picture that always hung on the living room wall, but her brother may contest that the picture was promised to him. Both have memories and emotions associated with the picture, so the fight can get acrimonious fast, potentially leading to a split family in which siblings aren’t communicating.

This is a situation where a will would be paramount. The purpose of a well-drafted will is to give clarity to your wishes to make sure this doesn’t happen to your family. Your executor can make sure that splitting up your assets doesn’t split up your family if you follow these best practices:

List the most important or valuable items outside your will.

Your will can get very long if you try to list every possession, family heirloom, and piece of valuable artwork that you want to stay in the family, so create a written statement naming what goes to whom.

  • Talk to your children and other family members first to see who values which items most.
  • The statement can be created before or after the will. From a legal standpoint, it doesn’t have to be witnessed, but if you expect it to be challenged, have it witnessed and dated when it’s created and whenever it’s amended.
  • Obviously, it’s no good if no one knows it’s there: Keep the statement with your will.

You may want to direct in your will that some items be sold. It may make sense to sell items of great value and distribute the proceeds. You can, for example, direct a valuable painting to be auctioned off and the proceeds split equally among your heirs.

Another option is to give everything away during your lifetime. The more you distribute during your life, the less will have to be dealt with after your death.

  • When you make gifts, make sure everyone knows about them so that the person receiving the gift is not accused of stealing after your death.
  • You can make a deed of gift for tangible personal property retaining the right to keep things in your home as long as you live. To make things extra easy for your executor and heirs, tape a note to an item such as furniture or artwork with the name of its new owner. For tax reasons, it may be better not to gift highly appreciated property during your life because the new owner will lose the step-up basis. Check with your estate planning attorney and tax accountant.

Get appraisals. Be guided in your decisions of who should get what by knowing the monetary value of the items you’re giving away in life or death. This will help your executor and heirs. You can stipulate that the asset be sold and the proceeds divided evenly so that the heir who really wants the asset can buy out the others.

Use a lottery. If you don’t do any of the above, your executor can set up a lottery system for distributing tangible assets. Your will or trust can spell out that your executor or trustee will do this and how then put names or numbers in a hat and have beneficiaries draw for the order to choose items.

Bear in mind that when children are supporting their parents in unequal ways, disagreements may surface, causing serious tensions. If one of your children provides most of your care, either make sure that child is compensated in the will or make sure your will is extremely clear to avoid strife. Remember that after your death, you won’t be around to talk your children through any disagreements.

The bottom line, the more clearly you specify who gets what, the less likely it is that strife will ruin the most important thing in your life: your family. Sometimes, your family will go into the process of affirming their commitment to remain connected as a family. This is the time to reconcile and forgive.

Don’t let the task of dividing your assets prevent you from finalizing and signing your estate planning documents. Call Chuck Bendig, to discuss your concerns. We can help you find the best solution for you and your family.

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Trusts For Those With Addiction Problems

Trusts For Those With Addiction Problems

Passing on your assets to someone struggling with addiction

Are you planning to include someone with an addiction as a beneficiary of your assets? You may have seen them repeat patterns of compromised decisions, poor judgments, and subsequent results that are far from favorable.

Have a discussion with your estate attorney

Although this discussion can be uncomfortable, it can help you avoid the inadvisable disbursement of your family’s wealth.

The US Department of Health and Human Services estimated that 10.1 million people abused opioids and/or methamphetamine in 2019. During the same time, NIAAA reports recorded that 14.5 million people over the age of 12 have suffered from Alcohol Use Disorders.

If these situations apply to your family, it is advisable to take their addiction into account when establishing your trust. It’s certainly possible to set up a trust account that prevents money from being used to further contribute to addiction. It can be very complicated, but it can be done.

Suppose you want to protect your heirs or your beneficiaries from using their inherited funds to fuel their addiction. Your estate attorney will ask him or her for permission to consult a nursing professional. When you get the help of an addiction expert, your lawyer can make informed recommendations on your behalf.

Addressing the impact of addiction on setting up an estate

Here are a few suggestions to deal with the risks of allocating property, and the safety of your choices. 

  1. Set up a trust account. People who are in recovery should be held accountable within boundaries. As such, you could set it up so that the money can only be disbursed inside certain parameters. The Trust can be monitored with the aid of a third-party on the beneficiary’s behalf. The third-party will usually authorize any distribution until the beneficiary has the means to responsibly manage their own inherited funds. Not all beneficiaries have the ability to be accountable with money, as it may be enticing to spend the money on matters that only contribute to and fuel their dependency. Find out if the inheritor has obtained financial counseling during their recovery, and determine if the beneficiary has the means to have complete management over his or her inheritance.
  1. A “Special Needs Trust” is designed to provide for people who have mental illnesses or disabilities, however, those aren’t always suitable for beneficiaries who have a dependency. As such, it’s not likely to fulfill the desires and positively benefit an heir that suffers from addiction and doesn’t have a disability. These two circumstances can coexist, so it’s recommended to assess if the beneficiary is disabled outside of their addiction.
  1. It is important that the funds placed in a Trust not be viewed as money that someone can only put toward recovery-related purposes. While the assets can be beneficial and support the beneficiary’s sobriety, making everything about the inheritor’s dependency can do more damage than good. People with addictions still need to pay for all of life’s expenses outside of recovery, so limiting their inheritance to recovery alone isn’t recommended.
  1. Appoint someone as a Trust Protector to assure that decisions made are in the best interest of the beneficiary. A Trust Protector will regularly choose certified addiction counselors to help the beneficiary along the way while keeping certain family members updated on treatment progress. This can ensure that the trust assists the beneficiary in a manner that prioritizes recovery rather than interfering with it or sabotaging their sobriety. 
  1. The Trust will contain specific instructions controlling when each distribution will be made and how much will be disbursed at a time. Clarify that the trust isn’t intended to be punishment for their addiction, rather, it’s designed to be a useful resource to help aid them in maintaining their recovery. When drafting the trust and all that it entails, be sure you incorporate some flexibility. You can enforce incentives to motivate the beneficiary to continue treatment or attain milestones.
  1. Finally, a beneficiary with an addiction may benefit from Supplemental Security Income or Medicaid. These are considered government grants, not trust-related assets. Trusts should be created to identify government grants as a means of paying costs to beneficiaries rather than using the trust assets. Make sure that trust does not interfere with the beneficiary’s right to these government benefits.

Setting up an estate with your family’s circumstances in mind

Addiction has infiltrated many families and each situation is unique. Work closely with a knowledgeable legal professional to draft a plan that will protect your heirs and your legacy.

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How to choose a Trustee

How to choose a Trustee

So you’ve finally made the decision to move forward with your estate plan and now you need to choose a trustee who will act on behalf of your heirs’ best interests. It can be a difficult choice, but there are a few notable factors in choosing the proper one that can make the process easier.

Some people begin by considering a family member or a close friend, but did you know there’s also the option to select a professional trustee such as an accountant, lawyer, trust company or corporate trustee?

A couple of notable things to keep in mind when making your decision to choose a trustee can ease the burden of choice.

Trustworthiness

A trustee’s duties include paying bills, making proper investments, keeping accounts and preparing tax returns. Therefore, a very close friend with their own unsteady financial problems may not be a good choice. Look for trustees among the financially astute, someone who is good with money; someone who is familiar with the basic concepts of investing is something to keep in mind.

Familiarity with your family dynamics

The people closest to you such as family members or dear friends that understand your family’s dynamics could be beneficial. Family members probably won’t charge a trustee fee, although they are entitled to it. So, if you’re looking to cut costs you may go this route.

Professionals have expertise in trust administration and with that knowledge comes a price. A lawyer or accountant that is not within your family is more likely to treat everyone equally. Maybe consider a lawyer or accountant who’s been working with your family for a long time if you have one. They may bill for less than a trust company or a corporate trustee.

Professionals such as these are good at making difficult decisions and telling beneficiaries “no” when appropriate. If your heirs don’t get along and there are large sums of money involved, it might be worth the fee of a professional trustee. If you feel uneasy, you can give a family member or friend the power to remove and replace a corporate trustee.

There is also the option of a co-trustee arrangement where two entities manage your trust. For example; a sibling and a professional trust company. The professional can handle the technical work while the sibling has family knowledge. It’s just another option to consider if you feel uncomfortable appointing just one trustee.

Here are a few characteristics to keep in mind when choosing a trustee option.

Traditional Corporate Trustee

  • Regulated
  • Professional
  • Rigid Policies
  • Conservative
  • Changing Personnel
  • Accountable

Individual Trustee

  • Sensitive and knowledgeable about family
  • Flexible/Subjective – saying “no” is difficult
  • Private
  • Inexpensive
  • Not Permanent
  • Individual Fiduciary Liability
  • Family Dynamics

Private Family Trust Company

  • Confidential
  • Permanent Trustee Solution
  • Institutionalize the personal, business & investment matters for a family
  • Personalized Service
  • Liability Protection
  • Flexibility in Managing Concentrated Positions

Depending on your values, one of these options could be the best one for you.
Whatever you choose, take into consideration that your trustee will likely be managing your trust for an extended time. Therefore, you’ll want someone you think will be around for a long while and has time to really devote to their trustee duties.

Don’t let the decision of who you should appoint your trustee prevent you from finalizing and signing your estate planning documents. Call around and speak to different trusted advisors, such as Chuck Bendig, to discuss your concerns and they can be worked through until you find the best solution for you and your family. You have the option to reevaluate your choice every few years.

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