Sell an Inherited Home to your Relative?
Sell an Inherited Home to your Relative?

Sell an Inherited Home to your Relative?

Sell an Inherited Home to your Relative?

Sometimes a kindness to a family member can backfire in unexpected costs. It is best to be fully informed about the short and long-term impact of any well-intentioned actions. The woman in this scenario gave her sister a $25,000 reduction in the price of the home, which was sold far below the appraisal value, according to the Los Angeles Times’ article “Selling an inherited house to a relative will affect tax treatment.”

For her generosity, the sister will not be able to take any kind of a loss on her taxes as a result of the lowered price.

The law is not entirely clear on the topic, because every situation is different, but the IRS and the Tax Court both frown on any use of real estate for personal purposes, after the death of a parent.

When it comes to a capital loss, the IRS appears to require that the inherited property be sold in an “arm’s length” transaction to an unrelated person. This means that both parties in the transaction, the buyer and the seller, are both acting in their own best interest and are not imposing any pressure or duress on each other in the transaction. Selling an inherited home to a sister is definitely not an “arm’s length” transaction, because of the relationship of the buyer and the seller.

The IRS also requires that the heirs and siblings did not use the property for personal purposes and did not intend to convert the property to personal use before the sale.

Even the Tax Court cases appear to at least require a conversion to an income-producing purpose before the sale, and no personal use of the property after the death of the parent.

While the family may find a court willing to say that a personal use by a sibling is not a personal use by the heir, and from the executor’s position, it was converted to investment property. However, in this case, an outright sale to a sibling and not an unrelated person makes it highly unlikely that the IRS would be amenable to the person taking a tax loss on the sale.

Talk with an experienced estate planning attorney before selling any large inherited asset to a family member or a non-family member. There are tax implications for the sale of inherited property that may not be readily apparent. The estate planning attorney will be able to explain the tax consequences and help create a plan for achieving the final end result, without creating any additional costs.

Reference: Los Angeles Times (June 2, 2019) “Selling an inherited house to a relative will affect tax treatment.”

Sell an Inherited Home to your Relative? Careful consideration of the tax due may cause you to sell it to a third party.

Is My Irrevocable Trust Revocable?
Is My Irrevocable Trust Revocable?

Is My Irrevocable Trust Revocable?

Is My Irrevocable Trust Revocable?

Irrevocable trusts aren’t as irrevocable as their name implies, according to Barron’s recent article, “Are Irrevocable Trusts True to Their Name?” The article says that, for both new and existing trusts, there are ways to build in flexibility to make changes to a grantor’s wishes, if terms are no longer appropriate or desirable for beneficiaries.

However, there are strict rules that apply. These rules vary between states. One of the main reasons for an irrevocable trust, is to remove assets from an estate for estate tax purposes and to make it unavailable for medicaid purposes. If the rules aren’t followed carefully, a trust can be rendered unlawful. If that happens, the assets may be returned to the grantor’s estate and estate taxes and nursing home costs may apply.

If you want to be certain that beneficiaries have some discretion in the future if circumstances change, grantors should build flexibility into the trust when it’s established. This can be accomplished by giving a power of appointment to beneficiaries. However, if the beneficiaries are looking to change the terms or the structure of an existing trust, the trust must be modified, according to state law.

Most states allow trusts to be decanted. When you decant a trust, you pour its terms into a new trust, and leave out the parts that are no longer wanted. Just like decanting a bottle of wine, it’s like the sediment left in the wine bottle.

In a state that doesn’t permit decanting, a trustee can ask a judge to allow it. You should be careful with decanting, because you don’t want to do anything that would adversely affect the original tax attributes of the trust.

The power of appointment in a trust or the ability to decant can’t be given to the person who set up the trust. Thus, grantors can’t have a “re-do” or rescind the terms. It’s only trustees and the beneficiaries that can do that.

If you and your attorney create a trust with a lot of flexibility for the trustee, you may want to appoint an institutional trustee from a bank, trust, or other financial services company.

They can be either the sole trustee or serve as co-trustees with a personal, non-institutional trustee, like a family member. This can help to eliminate future conflicts.

Reference: Barron’s (June 18, 2019) “Are Irrevocable Trusts True to Their Name?”

Is My Irrevocable Trust Revocable?

Life Insurance in My Estate Plan?
Life Insurance in My Estate Plan?

Life Insurance in My Estate Plan?

Life Insurance in My Estate Plan?

You’re not alone if you don’t fully understand the value and benefits that life insurance can give you as part of a retirement plan. Kiplinger’s recent article, “Don’t Overlook Advantages of Making Insurance Part of Your Retirement Plan,” says many folks see life insurance as a way to protect a family from the loss of income in the event a breadwinner passes away during his or her working years.

If that’s your primary purpose in buying a life insurance policy, it’s a solid one. However, that income-replacement function doesn’t have to stop in retirement.

When a spouse passes away during retirement, the surviving spouse frequently struggles financially. Some living expenses might be less when there’s just one person in a household, but the reduction in costs rarely makes up for the drop in income. One of the two Social Security checks the couple was getting goes away, and a pension payment may also be lost or reduced 50% or 75%. Life insurance can be leveraged to make certain there’s sufficient cash to compensate for that missing income. This lets the surviving spouse maintain his or her standard of living in retirement.

Why should I have Life Insurance in My Estate Plan? There are several sections of the tax laws that give life insurance income tax and transfer tax benefits. For example, death benefits typically are paid income-tax-free to beneficiaries and may also be free from estate taxes, provided the estate stays under the taxable limit. Also, any benefits paid prior to the insured’s death because of chronic or terminal illness also are tax-free. This is called an accelerated death benefit (ADB) and is a pretty new option. If your insurance doesn’t have this coverage, it can probably be added as a rider.

Finally, cash values can grow within a permanent life insurance policy without being subject to income tax. Any cash values more than the policy owner’s tax basis can be borrowed income-tax-free as long as the policy stays in effect. But if you were to pass away prior to paying back your policy loan, the loan balance plus interest accrued is deducted from the death benefit given to the beneficiaries. This may be an issue if your beneficiaries require the entire amount of the intended benefit. When the loan remains unpaid, the interest that accrues is added to the principal balance of the loan. If the loan balance increases above the amount of the cash value, your policy could lapse. That means you could you risk termination by the insurance carrier. If a policy lapses or is surrendered, the loan balance plus interest is considered taxable, and the taxes owed could be pretty hefty based on the initial loan and interest accrued.

There are fees that can includes sales charges, administrative expenses, and surrender charges. That’s in addition to the cost of the insurance, which grows as you age.

Just because you’re retired doesn’t mean you don’t still need the protections and benefits life insurance can offer you and your family.

Reference: Kiplinger (July 10, 2019) “Don’t Overlook Advantages of Making Insurance Part of Your Retirement Plan”

 

What Debts Must Be Paid Before and After Probate?
What Debts Must Be Paid Before and After Probate?

What Debts Must Be Paid Before and After Probate?

What Debts Must Be Paid Before and After Probate?

Everything that must be addressed in settling an estate becomes more complicated, when there is no will and no estate planning has taken place before the person dies. Debts are a particular area of concern for the estate and the executor. What has to be paid, and who gets paid first? These are explained in the article “Dealing with Debts and Mortgages in Probate” from The Balance.

Probate is the process of gaining court approval of the estate and paying off final bills and expenses, before property can be transferred to beneficiaries. Dealing with the debts of a deceased person can be started, before probate officially begins.

Start by making a list of all of the decedent’s liabilities and look for the following bills or statements:

  • Mortgages
  • Reverse mortgages
  • Home equity loans
  • Lines of credit
  • Condo fees
  • Property taxes
  • Federal and state income taxes
  • Car and boat loans
  • Personal loans
  • Loans against life insurance policies
  • Loans against retirement accounts
  • Credit card bills
  • Utility bills
  • Cell phone bills

Next, divide those items into two categories: those that will be ongoing during probate—consider them administrative expenses—and those that can be paid off after the probate estate is opened. These are considered “final bills.” Administrative bills include things like mortgages, condo fees, property taxes and utility bills. They must be kept current. Final bills include income taxes, personal loans, credit card bills, cell phone bills and loans against retirement accounts and/or life insurance policies.

The executors and heirs should not pay any bills out of their own pockets. The executor deals with all of these liabilities in the process of settling the estate.

For some of the liabilities, heirs may have a decision to make about whether to keep the assets with loans. If the beneficiary wants to keep the house or a car, they may, but they have to keep paying down the debt. Otherwise, these payments should be made only by the estate.

What Debts Must Be Paid Before and After Probate? The executor decides what bills to pay and which assets should be liquidated to pay final bills.

A far better plan for your beneficiaries, that includes a will and a comprehensive estate plan details how you want your assets distributed and addresses what your wishes are. If you want to leave a house to a loved one, your estate planning attorney will be able to explain how to make that happen, while minimizing taxes on your estate.

Reference: The Balance (March 21, 2019) “Dealing with Debts and Mortgages in Probate”

 

Leaving a Legacy Is Not Just about Money
Leaving a Legacy Is Not Just about Money

Leaving a Legacy Is Not Just about Money

Leaving a Legacy Is Not Just about Money.

A legacy is not necessarily about money, says a survey that was conducted by Bank of America/Merrill Lynch Ave Wave. More than 3,000 adults (2,600 of them were 50 and older) were surveyed and focus groups were asked about end-of-life planning and leaving a legacy. The article, “How to leave a legacy no matter how much money you have” from The Voice, shared a number of the participant’s responses.

A total of 94% of those surveyed said that a life well-lived, is about “having friends and family that love me.” 75% said that a life well-lived is about having a positive impact on society. A mere 10% said that a life well-lived is about accumulating a lot of wealth.

Leaving a Legacy Is Not Just about Money. People want to be remembered for how they lived, not what they did at work or how much money they saved. Nearly 70% said they most wanted to be remembered for the memories they shared with loved ones. And only nine percent said career success was something they wanted to be remembered for.

While everyone needs to have their affairs in order, especially people over age 55, only 55% of those surveyed reported having a will. Only 18% have what are considered the three key essentials for legacy planning: a will, a health care directive and a durable power of attorney.

The will addresses how property is to be distributed, names an executor of the estate and, if there are minor children, names who should be their guardian. The health care directive gives specific directions as to end-of-life preferences and designates someone to make health care decisions for you, if you can’t. A power of attorney designates someone to make financial decisions on your behalf when you can’t do so, because of illness or incapacity.

An estate plan is often only considered when a trigger event occurs, like a loved one dying without an estate plan. That is a wake-up call for the family, once they see how difficult it is when there is no estate plan.

Parents age 55 and older had interesting views on leaving inheritances and who should receive their estate. Only about a third of boomers surveyed and 44% of Gen Xers said that it’s a parent’s duty to leave some kind of inheritance to their children. A higher percentage of millennials surveyed—55%–said that this was a duty of parents to their children.

The biggest surprise of the survey: 65% of people 55 and older reported that they would prefer to give away some of their money, while they are still alive. A mere 8% wanted to give away all their assets, before they died. Only 27% wanted to give away all their money after they died.

Reference: The Voice (June 16, 2019) “How to leave a legacy no matter how much money you have”

 

Estate Planning Hacks Create More Problems
Estate Planning Hacks Create More Problems.

Estate Planning Hacks Create More Problems

Estate Planning Hacks Create More Problems.

The estate planning attorney in this gentleman’s neighborhood isn’t worried about this rancher’s plan to avoid the “courtroom mumbo jumbo.” It’s not the first time someone thought they could make a short-cut work, and it won’t be the last. However, as described in the article “Estate planning workaround idea needs work” from My San Antonio, the problems this rancher will create for himself, his wife, and his children, will easily eclipse any savings in time or fees he thinks he may have avoided.

Let’s start with the idea of putting all the man’s assets in his wife’s name. For starters, that means she has complete control and access to all the accounts. Even if the accounts began as community property, once they are in her name only, she is the sole manager of these accounts.

If the husband dies first, she will not have to go into probate court. That is true. However, if she dies first, the husband will need to go to probate court to access and claim the accounts. If the marriage goes sour, it’s not likely that she’ll be in a big hurry to return access to everything.

Another solution: set the accounts up as joint accounts with right of survivorship. The bank would have to specify that when spouse dies, the other owns the accounts. However, that’s just one facet of this estate planning hack.

The next proposal is to put the ranch into the adult children’s names. Gifting the ranch to children has a number of irreversible consequences.

When we actually look at estate planning hacks more problems are created. First, the children will all be co-owners. Each one of them will have full legal control. What if they don’t agree on something? How will they break an impasse? Will they run the ranch by majority rule? What if they don’t want to honor any of the parent’s requests or ideas for running the ranch?  In addition, if one of them dies, their spouse or their child will inherit their share of the farm. If they divorce, will their future ex-spouse retain ownership of their shares of the ranch?

Second, you can’t gift the ranch and still be an owner. The husband and wife will no longer own the ranch. If they don’t agree with the kid’s plans for the ranch, they can be evicted. After all, the parents gave them the ranch.

Third, the transfer of the ranch to the children is a gift. There will be a federal gift tax return form to be filed. Depending on the value of the ranch, the parents may have to pay gift tax to the IRS.  Because the children have become owners of the ranch by virtue of a gift, they receive the tax-saving “free step-up in basis.” If they sell the ranch (and they have that right), they will get hit with capital gains taxes that will cost a lot more than the cost of an estate plan with an estate planning attorney and the “courtroom mumbo jumbo.”

Finally, the ranch is not the children’s homestead. If it has been gifted it to them, it’s not the parent’s homestead either. Therefore, they can expect an increase in the local property taxes. Those taxes will also be due every year for the rest of the parent’s life and again, will cost more over time than the cost of creating a proper estate plan. Since the ranch is not a homestead, it is subject to a creditor’s claim, if any of the new owners—those children —have a financial problem.

In discussing estate planning hacks create more problems we haven’t even mentioned the family business succession plan, which takes a while to create and complements the estate plan. Both plans exist to protect the current owners and their heirs. If the goal is to keep the ranch in the family and have the next generation take the reins, everyone concerned be better served by sitting down with an estate planning attorney and discussing the many different ways to make this happen.

Reference: My San Antonio (April 29, 2019) “Estate planning workaround idea needs work”

 

Your Executor Doesn’t Want to Serve?
Your Executor Doesn’t Want to Serve?

Your Executor Doesn’t Want to Serve?

What if Your Executor Doesn’t Want to Serve?

When you’ve finally come to determine who you trust enough to serve as your executor, you’ll need to take the next step. It involves having a conversation with the person about what you are asking them to do. You’ll need to ask if they are willing, says the Pocono Record in the article “Don’t assume person is willing to be your executor.” People are often flattered at first when they are asked about this role, but if they don’t fully understand the responsibilities, they may decide not to serve just when you need them the most.

Once your executor has agreed to act on your behalf and you have a last will and testament prepared by an estate attorney, tell your executor where your will is stored. Remember that they need to have access, in addition to knowing where the document is. If the will is kept at home in a fire-proof box or a document box that is locked, make sure to tell them where the key is located.

If you feel that the will would be safer in a bank’s safe deposit vault, you have a few additional tasks to complete. One is to make sure that your executor will be able to access the safe deposit box. That may mean adding them to the list of people who have access. They may be technically permitted to enter the box with a bank representative solely for the purpose of obtaining the last will and testament.  However, you should check with your branch first.

Once they have the last will and testament and it is filed for probate, the Surrogate issues Letters Testamentary, which says that the executor has the authority to open the safe deposit box to inventory its contents, after proper notice is given to the state’s authorities. The executor must complete an inventory form for the authorities and any personal property in the safe deposit box must be appraised for fair market value as of the date of death. Inheritance tax will need to be paid on the value, if there is any due.

Communication is very important in the executor’s role. You may or may not want to allow them to see the will before you pass, but they will need to know where the original document can be found.

To make the next part of the executor’s job easier, create an inventory of your assets and include information they will need to complete their task. They’ll also need to know contact information and account numbers for homeowners and car insurance, veterans’ benefits, credit cards, mortgage, pensions, retirement accounts and any other assets.

Some people store their information on their computer. However, if the executor cannot access your computer or cannot get into the computer because they don’t have your password, you may want to create a hard copy document, as well as keeping information on your computer.

Taking on the role of an executor is a big job. You can show your appreciation, even after you are gone, by making all preparations for the information needed. If Your Executor Doesn’t Want to Serve initially, perhaps their mind can be changed by being organized, having a list of assets and a list of contacts.

Reference: Pocono Record (May 1, 2019) “Don’t assume person is willing to be your executor”

 

Celebrity Estates are Like Dynamite: Kaboom!
Celebrity Estates are Like Dynamite: Kaboom! Celebrity explosives

Celebrity Estates are Like Dynamite: Kaboom!

Celebrity Estates are Like Dynamite: Kaboom!

Dividing his estate between 11 different people was quite a task for pop star George Michael’s lawyers. He left out his ex-boyfriend Fadi Fawaz and his friend Kenny Goss, raising a lot of eyebrows, says The Irish Sun in the article “Most explosive wills in Hollywood history which left families feuding for decades after George Michael document revealed.” However, he’s far from the only celebrity to cut out loved ones from their estates.

Mickey Rooney—When movie star Mickey Rooney died in April 2014, at the lofty age of 93, most people assumed that this wife and eight children would be his heirs. Rooney had a long career, starring in many movies with many bold face named stars. However, he had a surprise—he left behind just about $18,000 to his stepson Mark Aber and disinherited his wife and other children. Several of his biological children objected to the will, which was signed just a few weeks before his death. The case was later dropped, because it was too small an amount to litigate over.

Tony Curtis—He is another movie star who left absolutely nothing to his biological children, when he died in 2010. One of his children is Jamie Lee Curtis, a successful actress and author. Instead, the star of “Some Like It Hot” and many other movies left approximately $39 million to wife number six, Jill Vandenburg Curtis. Making matters worse, she turned around and auctioned off his personal belongings, adding another million to her pile. His daughter said they were “blindsided” by his decision, and her sister Kelly started a lawsuit, but later dropped it.

James Brown—This is an estate battle that is just about as legendary as the soul-singer himself. Thirteen years after he died, his last will and testament is still unsettled. Lawsuits, murder accusations and a battle for ownership of his music catalog is still going on. About a dozen lawsuits have been filed by his nine children and grandchildren, who are suing his widow and claiming that she was married to another man when she wed Brown. That estate is estimated to be worth $99 million.

Joan Crawford—Made infamous by her daughter Christina’s tell-all book, “Mommy Dearest,” Crawford left more than $2 million to two of her adopted children, when she died in 1977. She made it very clear in her will that her son Christopher and Christina were not to receive anything. However, the two contested the will and won about $50,000 each.

Marlon Brando—With 10 children to his name, he recognized all but one—adopted daughter Petra—and left out his teenage grandson, son of his late daughter Cheyenne Brando—in his will. With an estate estimated at $20 million, Brando passed away at age 80.

Michael Jackson—The “gloved one” cut his father out of his will, before he died from a drug overdose in 2009. His father tried to contest the will but failed. Michael did not include his famous siblings either. It is thought that several of his brothers and sisters are now engaged in an estate battle, which is worth more than $1 billion. Michael took good care of his mom and his three children, Prince, Paris and Blanket.

To speak with attorney Frank Bruno, Jr. about your individual situation, please schedule a telephone call or appointment.

Reference: The Irish Sun (June 5, 2019) “Most explosive wills in Hollywood history which left families feuding for decades after George Michael document revealed.”

Celebrity Estates are Like Dynamite: Kaboom!

Planning on Disinheriting a Child
Planning on Disinheriting a Child? Best to Be Careful!

Planning on Disinheriting a Child

Planning on Disinheriting a Child? Best to Be Careful! The law is very specific when it comes to disinheriting your child, so it is a good idea to be perfectly clear on your wishes or it can backfire, according to the Santa Cruz Sentinel in “No shortcuts when planning estate trust.”

Let’s consider this example: A couple has a son and a daughter. Both are named beneficiaries on a revocable trust. The parents decide they want to change the revocable trust, naming the daughter as the sole beneficiary. They also want to revoke the son’s power of attorney. The trust is simple, and the assets include a home and some bank accounts.

Anyone has the right to leave their assets to anyone they choose, but the couple (and the daughter) should expect the son to challenge this disinheritance and if that is truly what they wish, they need to plan in advance for litigation.

For starters, the couple needs to meet with their estate planning attorney, privately, with the daughter nowhere in sight. She should not even give them a ride to the attorney’s office. There will be questions about “undue influence” directed at her.

Undue influence is a legitimate reason to challenge an estate plan. The three factors in undue influence are:

“Confidential relationship”—meaning that the parents trust and confide in the daughter;

“Active procurement”—for instance, if the daughter made the appointment, joined in the meeting and spoke on behalf of her parents; and

“Unjust enrichment,” which means that one person is trying to get more than a “fair” share.

If these three conditions are met, the changes in the estate could be found to be invalid. The burden of proof would be on the daughter to prove that this was what her parents wanted and not what she devised. It would not be an easy case.

This couple needs to meet with their estate planning attorney and amend their trust. The attorney and their staff members will be considered “disinterested witnesses” who will be able to speak to the parents’ mental capacity and whether it was truly their intent to favor the daughter. The attorneys in this case need to be extra careful to take thorough notes. If there is a lawsuit, the daughter might have the opportunity to say why the change was made, but her testimony may be disregarded as self-serving.

Planning on Disinheriting a Child? Best to Be Careful! Another question that comes up when people want to disinherit a child, is whether they should simply change the name on the deed to the home, thinking that this will avoid an estate battle. That becomes problematic on many levels. If they decide they want to sell the home, or borrow against it, or get a reverse mortgage, then the deed must be retitled again. If the daughter gets title to the home and has some kind of legal trouble, a judgement lien could be recorded against the house.

Reference: Santa Cruz Sentinel (June 9, 2019) “No shortcuts when planning estate trust.”

 

Six tips for Small Business Planning
Six tips for Small Business Planning.

Six tips for Small Business Planning

Six tips for Small Business Planning

 

Failing to conduct long-term personal planning can create a reality, where a business owner under-insures and underinvests outside her own companies.

Think Advisor’s recent article, “The 6 L’s of Small-Business Planning” says that a successful business essentially becomes a security blanket. That’s because business owners don’t adequately prepare for events that could change the course of their financial well-being. It’s critical to address the important events that can disrupt everything personal and business.

Liquidity: If a business owner has to write a big check for some unexpected repairs after a storm, the money must come from somewhere. Small businesses rarely have substantial liquidity, because so much of their capital is tied up in the company. Therefore, a line of credit is the most frequent solution for owners with this situation.  You should instead try to ensure that you have access to cash in the short term, if necessary.

Long-term disability: In many instances, business owners are the main contributors to their small company’s success. If they can’t work, the whole company can suffer. She should have a plan to protect against this scenario. First, it is important to identify who can step into a leadership role for a short time. If the disability is long term, examine the ways in which it might affect the company’s value and succession plan. You can purchase business overhead insurance or policies that offer income replacement. You can also create buy-out agreements, so key employees can buy out the disabled business owner.

Loss of life: In the event that an owner suddenly dies, you should have life insurance to fund a buy/sell plan. Without a plan, you may become forced to work with your deceased business partner’s spouse.

Long-term care: Baby boomers with business wealth may wonder what will happen if they need significant medical care, which is a legitimate concern. There’s an additional consideration: the elderly parents of business owners. If an owner steps away to help provide care for an ailing parent, the potential disruption to the company may be significant. Look at where the capital is going to come from, to offset the cost of long-term care for family members, because you don’t want a forced liquidation of business assets.

Longevity: Consider the impact to the company, if the owner has an unusually long life. This should include an examination of how that person’s role will change and who will succeed them through phases of potentially decreasing interest and capacity.

Legacy/legal: Look at what the business owner envisions as her legacy for the future. There are numerous types of trusts, gifts and legal vehicles can be used to help make certain that the business won’t be ruined by taxes, when ownership is passed to the next generation. Talk to an estate planning attorney about doing this the right way.

At each annual business review, review your plans to see if they can still be effective responses to the six Ls of small business planning.

Reference: Think Advisor (May 28, 2019) “The 6 L’s of Small-Business Planning”

Six tips for Small Business Planning. The six points of discussion are liquidity, long-term disability, loss of life, long-term care, longevity, legacy and legal.