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Serving Southwest Florida

Helping clients plan for their family's future, by creating an efficient, thoughtful and comprehensive estate plan that preserves their legacy and gives them peace of mind.

Avoiding Probate with Homestead

This homestead estate planning issue concerns a single retired parent of an only adult daughter and how to transfer the home to the daughter. Should the daughter simply sell the house when her mother dies, or should the daughter be added to the deed now while her mother is alive?

Also, is there a court hearing?

In many states, there is no reason or requirement to go before a judge to probate your estate, says nj.com in its recent article “Should I add my daughter’s name to my home’s deed?”

In Florida estate planning, there are three primary questions to answer about the transfer of the home. First, adding the daughter to the title of the homestead property could jeopardize the property’s homestead status.  This can lead to a substantial increase in property taxes.

Second, there would possibly be some significant capital gains if the mom adds her daughter to the deed prior to death.

Also, if the mother winds up requiring Medicaid, Medicaid might put a lien against the home after she dies for the value of the services it provided.

Generally, when a home has been owned for a long time, the mother should try to preserve the step-up in basis for tax purposes that happens, if the real estate is still in the mom’s name at her passing.

Whether that step up is preserved and whether the homestead status is affected, depends on how the daughter is added to the deed.

Adding the daughter as a joint tenant or tenant in common won’t preserve the step-up basis for taxes and will negatively affect the homestead status. Ask an elder law attorney what this means in your specific situation.

A better option may be the Enhanced Life Estate Deed, where the mother transfers the property to her daughter but retains an enhanced life estate in the property.  The mother retains her authority to sell and put a mortgage on the property without the consent of the daughter.  Since there is no current transfer of the property the homestead status is not affected.  And since, the daughter receives the homestead at the mother’s death, that will preserve the step-up in basis at death.

This can also get complicated when there’s an outstanding mortgage, so speak to an experienced estate planning attorney.

Reference: nj.com (Dec. 15, 2020) “Should I add my daughter’s name to my home’s deed?”

 

Estate Planning Disasters

The potential of estate planning disasters looms in the near future.  One of the largest wealth transfers our nation has ever seen is about to occur, since in the next 25 years, roughly $68 trillion of wealth will be passed to succeeding generations. This event has unique planning opportunities for those who are prepared, and also big challenges due to the ever-changing legal and tax world of estate planning.

Fox Business’ article “5 estate planning disasters you’ll want to avoid,” discusses the biggest estate planning disasters to avoid.

Failing to properly name beneficiaries. This common estate planning mistake is easily overlooked, when setting up a retirement plan for the first time or when switching investment companies. A big advantage of adding a beneficiary to your account, is that the account will avoid probate and pass directly to your beneficiaries.

Any account with a properly listed beneficiary designation will override what is written in your will or revocable living trust. Therefore, you should review your investment and bank accounts to make certain that your beneficiaries are accurate and match your intentions.

Naming a minor as a beneficiary. This can be an estate planning disaster, if they are still minors when you die. A minor won’t have the legal authority to take control of inheritance or investment accounts until they reach the age of 18 or 21 (depending on state law). When a minor receives an asset as a beneficiary, a court-appointed guardianship will be created to supervise and manage the assets on behalf of the minor. To avoid this mistake, you can name a guardian for the minor child in your will.

Forgetting to fund a trust. Creating a trust is the first step, but many people don’t properly fund their trust after it’s established.  If you don’t transfer your assets to the trust, they will have to go through probate – a serious estate planning disaster.

Making a tax mess for your heirs. A significant advantages of passing on real estate or other highly appreciated investments or property, is that your beneficiaries receive what is known as a “step-up” in basis, so that they aren’t responsible for any income taxes on the appreciated assets when they are received. The exception is when inheriting retirement accounts, such as 401k’s and traditional IRAs. Except for a surviving spouse, inheriting a traditional IRA or 401k means that you are now responsible for the taxes owed. With the recent passage of the SECURE Act, most non-spouse beneficiaries must totally withdraw a 401k or IRA within 10 years. It is deemed to be ordinary income for beneficiaries, which could result in a huge tax bill for your heirs. To avoid this, you can convert some or all of your retirement account assets to a Roth IRA during your lifetime, which lets you to pay the conversion taxes at your current income tax rate—a rate that may be much lower than your children or grandchildren’s tax rate. When you pass away, any money that is passed inside a Roth IRA goes tax-free to your heirs, avoiding an estate planning disaster.

Failing to create a comprehensive estate plan. Properly establishing your estate plan now, will care for your loved ones financially, and can also save them a lot of emotional stress after you’re gone.

Talk to an experienced estate planning attorney about planning now. It can really affect your family for generations. It is one of the best gifts that you can leave your family.

Reference: Fox Business (Nov. 12, 2020) “5 estate planning disasters you’ll want to avoid”

Probate and Real Estate

There as unique issues when dealing with probate and real estate. For a family whose 91-year-old mother lives in her home, has a will and has appointed two sisters as attorneys in fact under her Power of Attorney and personal representatives of her estate, the question of handling the transfer of the home is explored in a recent article from the Herald Tribune, “Transfer title now or go through probate in the future?”

The family wasn’t sure if it made more sense to transfer the title to her two daughters and son while she was still living, or let the children handle the transfer as part of the estate. The brother may wish to purchase the home after the mother passes, as he lives with his mother.

If nothing is done, the house will be part of the probate estate. An estate will have to be opened, a representative will be appointed by the court (usually the personal representative of the will) and then the personal representative can sell assets in the estate, close accounts and deal with the IRS and the Social Security Administration. The probate process can be time-consuming and expensive, depending on where the mother lives.

There are a number of steps that could be taken to simplify things and make sure that probate and real estate do not become an issue. The mom’s assets can be held jointly, so they pass to the surviving owner, an enhanced life estate deed can be created, under which the the children would acquire title automatically at her death, or a trust can be created, and her assets be titled to the trust, so they pass automatically to beneficiaries.

The issue of the house becomes a little more complicated because there are so many options. If the house has appreciated significantly over the years, keeping it in the estate will minimize taxes that have to be paid if and when it is sold.

For example, let’s say the house has increased in value by $250,000. Under current tax law, the mother can exclude up to $250,000 in profits from the sale of the home. This is the exclusion before the sale of a primary residence where the owner has lived in the home for two out of the last five years.

If she signs a quitclaim deed now to give the home to her three children, the IRS will consider this a gift to the three children. Her cost basis in the property (what she paid for the home, plus the cost of any material or structural improvements) will be transferred to the children. However, when the children go to sell the property, they won’t have that same $250,000 exclusion. The three siblings will have to pay federal income or capital gains tax on the same of the home.  The mother may also lose her Florida homestead exemption.

However, if the home remains in the mother’s estate when she passes, the siblings inherit the home at the stepped-up basis. In other words, the value of the house (for estate tax purposes) will rise to the current market value at the time of her death, and not the value when she paid for the house. If the children decide to sell the house immediately, there won’t be any profit and there won’t be any taxes.

In Florida, the children would be able to use an enhanced life estate deed that would let the property transfer automatically to heirs upon the mother’s death. The siblings then inherit the property at the stepped-up value and avoid the problems of probate and real estate.

Here’s another question to consider: how does the cost of setting up trusts and enhanced life estate deeds compare to the estimated cost of probating the estate?

This family, and others in the same situation, should speak with an estate planning attorney to evaluate their options. The siblings in this case need to clarify whether their brother wants to buy the house and if he is able to do so. The mom then needs to make a decision, while she is still able to do so, because after all, it’s still her home.

Reference: Herald-Tribune (Nov. 7, 2020) “Transfer title now or go through probate in the future?”