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?


Stock Gifts to Grandkids: Does it Make Sense?

Grandfather and granddaughterWhat if you are the owner of two blue chip stocks worth $100,000 and have owned these for more than 30 years, paying taxes on the dividends every year. Rather than get hit with a capital gains tax, is it a good idea to gift the stock to your grandchildren?
What are the ramifications for taxes and/or cost basis if you gift these to the grandkids by changing ownership? If the grandfather does this while he is still alive, how does this shake out as far as taxes and cost basis for the recipients—or should he pass the stocks upon his death?
A recent New Jersey 101.5 article, "Tax differences between gifted or inherited stock," explains that there are several options—all with some ramifications; however, some may be more attractive than others.
Before examining the choices, first let's review cost basis and the capital gains tax. The cost basis is the price that you paid to purchase the stock in addition to other costs like commissions and fees. When the stock is sold, tax liability is calculated based on the cost basis and the sales price. If the stock is sold for more than the original cost basis, the difference will be taxable as a capital gain in the year of the sale.
If the stock is in a qualified savings account (an IRA, 401(k) or 529 plan), it would be taxed only when withdrawn.
If a stock is held for more than one year, it's considered to be long-term. These are taxed at lower rates than ordinary income. Long-term capital gains are taxed based on the taxpayer's tax bracket.
If the grandfather gifts the shares to the grandchildren, the ownership of the shares would be based on the age of the grandchildren. If they are minors, the shares would have to be held in custodial form, but if they are adults, they can own the shares in their own names.
Gifting shares while the grandfather is still alive will not get rid of the capital gains when the stock is sold.
The Kiddie Tax
The grandkids getting the appreciated stock would assume the same cost basis as the giver. In this instance, when the grandchildren sold the stock, they would have a capital gain. And if they're under 19 or full-time students under age 24, some of the tax rate on the sale of the stock may be taxed at their parent's tax rate. This is called the "kiddie tax."
The kiddie tax rules are pretty complex, but as a general rule, children under 19 or full-time students under 24 can exclude the first $1,050 of unearned taxable income from their tax return. The next $1,050 is taxed at the child's rate. Anything more than that amount is taxed at the parent's tax rate.
So, depending on the specifics, there may be little or no tax savings to be gained by giving the stock to the grandkids, and a higher tax rate might be paid if the kids' parents are in a higher tax bracket than the grandfather.
As another option, if the stock is gifted upon the grandfather's death, the grandchildren would receive the stock with a cost basis equal to the value at the date of death or—if elected by the executor—the value nine months later (this is called the "alternate valuation date"). This is a stepped-up basis. As a result, most or all of the gain in the stock immediately prior to the grandfather's death would be eliminated.
Reference: New Jersey 101.5 (March 3, 2016) "Tax differences between gifted or inherited stock"


NO NEW TAXES! But Now What?

NoNewTaxes_jpg_800x1000_q100Accountants and financial advisors may be breathing a sigh of relief that there were no major new tax-law changes this year, but that doesn't mean they're happy about the higher taxes their clients are paying now compared to just a few years ago. But income taxes are higher. The top bracket is now 39.6 percent for people earning $400,000 as singles and $450,000 for married couples filing jointly. High earners also pay a 3.8 percent Medicare surtax on their net investment income if their modified adjustable gross income is more than $200,000 for singles and $250,000 for married couples. And there's the 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married.

According to a recent post on cnbc.com, titled Tax planning tips for high-income earners,” tax planning is better done looking ahead three or five years. If you see a trend, such as an increase or reduction in income, you can alter your deductions or deferrals.

To avoid adding to your tax burden, make sure to leverage some income-producing investments, like bonds and real estate investment trusts, as well as tax-sheltered accounts—including 401(k) plans and IRAs. But this investment income is taxed as ordinary income and could bump you into the higher categories if you’re right on the edge of the line. However, if you place it in a retirement account, there’s no tax owed until the funds are withdrawn, and in the case of Roth IRAs, no tax will ever be owed after the contributions are made.

A higher estate tax exemption means that fewer people pay the federal estate tax now, and some experts are reconsidering their traditional advice. A former rule of thumb held that you should give away as much as you can during your lifetime; however, nowadays, there can be some real advantages in keeping things in your estate. In retaining appreciating assets inside the estate, heirs would have the opportunity to get a stepped-up in basis when they inherit. For instance, if a stock grows from $100 to $1,000 during a person's lifetime, the clock will reset for heirs when they inherit it. When the heir sells the stock, his or her cost basis is determined as of the date they inherited the assets (so they will not pay tax on the income from $100 to present—only from $1,000).

Each state has different rules about estate taxes, and you should talk to your estate planning attorney about this. It is also important to remember that not all beneficiaries of an estate actually live in the same state.

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

Reference: cnbc.com (January 28, 2015)Tax planning tips for high-income earners

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