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What’s Better: A Joint Tenancy or a Trust to Give a Home to a Child?

House“When leaving a home to your children, you can avoid probate by using either joint ownership or a revocable trust, but which is the better method?”

In the event you decide to add your child as a joint tenant on your home, you’ll each have an equal ownership interest in the property. When one joint tenant dies, the other joint tenant owns the entire property. This is an option that has the advantage of allowing you to avoid probate.

A recent article asks “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?

This article, in elderlawanswers.com, explains that a disadvantage of joint tenancy is that creditors can attach the tenant's property to satisfy a debt. In such a case, if a co-tenant defaults on his or her debts, the creditors can sue in a partition proceeding to have the property interests uncoupled so the property can be sold, even over the objections of the non-debtor owner(s). What’s more, without a creditor issue, one co-owner of the property can sue to partition the property and can force another owner to move out.

Joint tenancy can also impact the capital gains treatment of the property. When you give property to a child, the tax basis for the property is the same price for which you purchased the property.  However, inherited property receives a step up in basis. This means that the basis would be the current value of the property. When you pass, your child inherits your half of the property—one half of the property will receive a step up in basis. However, the tax basis of the gifted half of the property will be the same as the original purchase price. If your child sells the home after the parent dies, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. To avoid this tax, the child must live in the house for at least two years before selling it. When that happens, he or she can exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.

Revocable Trust

If you place the property in a revocable trust and name yourself as the beneficiary and your child as the beneficiary after you die, the property will go to your child without going through probate when you pass away. A trust will also be able to guarantee you the right to live in the house and take into account changes in circumstances, like if your child passes away before you do.

One other important benefit of a trust pertains to capital gains taxes. The tax basis of property in a revocable trust is stepped up when you die. This means the basis in the home would be the date of death value of the property. Therefore, if your child sells the property immediately after inheriting it, the value of the property would not see much change. As a result, the capital gains taxes would be little or nothing.

A trust typically allows for greater flexibility and offers more options to protect both the parent and the child. Everyone’s situation is different. Be sure to speak with a qualified estate planning and Elder Law attorney about how to pass down your property effectively.

Reference: elderlawanswers.com (February 27, 2017) “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?

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Supreme Court Changes Estate Planning for Married Same-Sex Couples

Female gay couple"The Supreme Court ruled that the Constitution guarantees a right to same-sex marriage."

The recent Court decision has changed financial and estate planning significantly for same-sex couples, including taxes and retirement planning.

In The Kansas City Star's article, "Your financial planner: A guide for same-sex couples," married same-sex couples are advised to be aware of these changes in order to take advantage of the benefits.

When figuring out your income taxes, married same-sex couples are now able to file a joint state tax return, along with the federal joint return, which should make things easier. In addition, Social Security for married same-sex couples has changed, granting both partners access to their spouse's work record and benefits—which could be higher than their own individually.

Now a spouse can leave property to the surviving spouse without paying estate taxes when the first spouse dies, and a married survivor in a same-sex couple also now is under the state's intestacy statute. If a married person dies without a will, the state will typically give more property to the surviving spouse than other family members.

From an estate planning perspective, the process remains the same. When reviewing your assets, it's important to check how accounts are titled and make sure the primary and contingent beneficiaries are correct. If the couple has created a revocable trust, assets must be titled in the trust's name where appropriate and used on the beneficiary lines, according to their estate planning attorney's instructions.

When an IRA passes to a beneficiary, spouses get special tax treatment because of a spousal rollover provision. A surviving spouse of a same-sex married couple can now delay taking distributions until age 70½ and delay IRA distributions over their own lifetime.

Finally, gift taxes previously applied to transfers of assets exceeding $14,000 between same-sex couples, but now the law allows gifts of any amount between them under the unlimited marital deduction.

The case Obergefell v. Hodges changed the landscape for same-sex married couples in 2015. If you're a partner in a same-sex marriage, you'll want to speak with your estate planning attorney and take advantage of these new benefits.

Reference: The Kansas City Star (February 17, 2016) "Your financial planner: A guide for same-sex couples"

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Don’t Plant a Bomb in Your Estate Plan to Blow Up the Future for Your Kids!

Boom"The real reasons to do estate planning are to take care of ourselves and our families the way that we want to."

In a review of their finances for the New Year, many well-meaning parents may unknowing plant a tax bomb for their children in their estate plan. Fox 61 News' recent report, "Tips to avoid an income tax and estate planning time bomb," explains how timing is critical to gain the most from an inheritance. Simply put, the taxes due on the sale of an asset can be drastically different depending on how the asset was inherited by an heir.

For example, parents may decide to deed a home to their son while they are alive to protect it from long-term care costs or to avoid probate. Because the child didn't pay the parents the fair market value of the place, it's considered a gift, and a gift tax return may be required depending on the value of the home. The more the property is worth at the time of its sale, the greater the gain and the larger the tax bill will be.

These parents unknowingly planted an income tax bill bomb for their children by gifting property during their lifetimes instead of allowing the children to inherit the property after their deaths.

However, if the parents had used a revocable trust to own the home, then the residence would be passed on after death. In this scenario, the heir would not owe any income tax, provided the property was sold for what it was worth at the date of death. This works regardless of how much the property is worth at the time of the parents' passing.

Young or old—it doesn't matter—if you don't have an estate plan, have one created now. Start with the basics, and if you need to, do the additional planning as it applies to your situation. Speak with an experienced estate planning attorney. In addition, remember these tips:

  • Review and update your beneficiary designations.
  • Review and update your insurance policies. Check the amount of coverage and make sure it still meets your family's current needs.
  • Consider purchasing long-term care insurance to help pay for the costs of long-term care in case you and/or your spouse ever need it due to illness or injury.

Plus, at a bare minimum, everyone over the age of 18 needs a Power of Attorney for Heath Care, a Living Will, and HIPPA authorizations. Also, a Revocable Living Trust may be better than a will at incapacity because it avoids the court's control over your assets. And while you are at it, review and update the guardian designation for any minor children.

It's critical to work with an estate planning attorney who can keep your estate plan up-to-date with all of the changes in the law, changes in your finances and health, and changes in the health and finances of family members.

Reference: Fox 61 News (January 4, 2016) "Tips to avoid an income tax and estate planning time bomb"

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Four Important Dates to Consider When Reviewing Your Estate Plan

Important-Dates-1Whenever clients ask if they need to update their will or trust, the first question back to them is: “When was it created?” If they say it was 10 to 15 years ago or longer, the attorney may react like they found expired food in the fridge because it may not be safe to use something that old. Your family and personal situation has probably changed a lot since then (perhaps your will or trust was created when your children were in high school, but now they’re married with kids). The tax laws have changed a lot over the years, too.

The website nextavenue.org recently posted a very informative article, titled “Why Your Will May Be Out of Date,” which states that although your estate planning documents are still valid, they may no longer work the way you originally thought they would.

But how do you know if your estate plan is out-of-date? If your will or trust was created prior to the four key “freshness dates” listed below, it’s time to visit your estate planning attorney for a review.

April 14, 2003: the required HIPAA compliance date. The HIPAA privacy rule imposed strict guidelines on the disclosure of “protected health information” (or PHI) without the patient’s express permission. The privacy protections are designed to help us, but they could be problematic if your executor, trustee or agent (under a durable power of attorney) needs to speak about your personal details with your employer, insurer, or medical providers. The rule says that to act on your behalf, an authorized person must have a written document executed by you, with very specific language required by HIPAA. The article says that if your will, revocable trust, durable power of attorney or health care power of attorney was executed before April 14, 2003, your executor, trustee or agent may have some trouble working with your medical providers and insurers. Talk to an estate planning attorney and have him or her update your documents to include the required HIPAA language.

January 1, 2005: if you live in a state that imposes its own state-level estate or inheritance tax. Prior to 2001, there was a federal credit for state death taxes, varying by the size of the estate. There was little incentive to make plans for avoiding state death taxes because those taxes were totally offset by the federal credit. However, the Economic Growth and Tax Relief Act of 2001 (EGTRA) phased out the credit between 2002 and 2004, and since January 1, 2005, state estate or inheritance taxes apply in addition to any federal estate tax. There are now 15 states that impose their own state estate tax. Seven states have an inheritance tax. Several states have both. If you live in a state that imposes its own estate tax and your will or revocable trust was executed before 2005, you need to talk to your estate planning attorney about these state taxes.

December 17, 2010: the enactment date of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“TRA 2010”). This upped the federal estate tax exclusion to $5 million for 2010 and indexed it to inflation after that. For 2015, the federal estate tax exclusion is $5.43 million. In effect, TRA 2010 eliminated the federal estate tax for thousands of people, so if your estate plan was created before December 17, 2010, your estate planning documents may contain federal tax-planning provisions that are no longer needed. Talk to your estate planning attorney about a better and simpler plan. However, the reverse may be true if you live in one of the 20 states that imposes a state estate tax or inheritance tax. There may be a more sophisticated plan you need to consider with your attorney to deal with state estate taxes, as they usually start at a much lower threshold. The article stresses that tax laws are drastically different today: estate planning documents drafted before December 17, 2010 may produce unexpected or unfavorable results.

January 2, 2013: the American Taxpayer Relief Act of 2012 (ATRA) went into effect. This is important for married couples with a combined taxable estate exceeding $5.43 million – it made the “portability election” a regular feature of federal estate tax planning, which allows an executor to transfer a deceased spouse’s unused federal estate tax exclusion to a surviving spouse, a very important estate-planning tool. So, if you are married and your will or trust was drafted before January 2, 2013, you need to sit down with your attorney—you might be missing out on valuable tax planning opportunities.

For more information about estate planning, please visit my estate planning website.

Reference: nextavenue.org (April 27, 2015) “Why Your Will May Be Out of Date”

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