Can I Bequeath My Home to My Children without Taxes?

As part of your estate planning, you can pass your house tax-free to an heir. savingadvice.com’s recent article entitled “Use These Tips to Pass Your House to Your Heirs Tax-Free” reminds us that the most important thing is to look at the total value of your entire estate (not just your home). If the value is more than $11.58 million (the unified federal estate gift and estate tax exemption amount for 2020), then your estate will be subject to estate taxes. If it’s under that amount, there’s no worries, and you can pass a house tax-free through a will. However, you may also have state estate taxes on the inheritance.

Ask an experienced estate planning attorney about the potential capital gains taxes your heirs may have to pay, when they sell the property. If you owe any money to Medicaid upon your death, the state can place a lien on your property, which can affect your heirs. Let’s look at some options to discuss with your estate planning attorney:

Irrevocable Trust. If you have an estate that’s more than the $11.58 million amount, you might want to look at putting the house into an irrevocable trust, instead of just including it in your will. Ask your attorney about a qualified personal residence trust. When you die, the house will go to the heir(s) that you’ve designated with the trust. However, if you sell the house, the money goes into the trust and can’t be cashed out if the situation changes. It’s something to consider, if you have a high-value estate and want to pass a house tax-free to your children or other loved ones.

As a Gift. You can gift a house to your children, and there will be no taxes on that, if the value of your home is less than the $11.58 million. However, you must file a gift tax form when you do your annual taxes. As long as the value is below that amount, it should just be a matter of filing the form and not paying any fees.

Look at total value of your estate and your home. File a gift tax form with the IRS in the year that you gift the home and offset the total amount of the gift by first using your annual gift-tax exclusion of $15,000. This is per donee and per donor, so if you and your spouse jointly own the property and you gift it to multiple children, you can up the exclusion amount.

You shouldn’t apply for Medicaid within five years of gifting your home to your child, because there may be a transfer penalty if you gift assets just before applying for Medicaid benefits.

Can You Sell the House and Gift the Money? You can sell the home at current market value, then gift that money to your child. You can do this in a will or trust or give it to them directly. You could also sell the home to your child at a very low price. They’d get the house and can sell it themselves at a higher value when the time is right for them to do so. However, they may have to pay higher taxes when they do.

Selling your Home to Your Child for $1? OK, you’re technically selling the house, so it’s not a gift. However, the remainder of the value of the house is considered a gift, so the gift tax rules still apply. If your child sells the house, they must report the entire difference as a gain, which means capital gains taxes.

If you want to sell your house to your child, you should consider selling it to them with a small down payment as a seller-financed sale. You’ll carry the note for the balance, and your adult child will make affordable payments. You can even offset what they pay you, by gifting them up to $15,000 per year (which is low enough not to trigger the gift tax). Since you’ve sold the home, it’s no longer a part of your estate, so you don’t have to worry about taxes on your end.

Reference: savingadvice.com (July 29, 2020) “Use These Tips to Pass Your House to Your Heirs Tax-Free”

State Laws Have an Impact on Your Estate

Nj.com’s recent article entitled “Will N.J. or Florida’s tax laws affect this inheritance?” notes that first, the fact that the individual from Florida isn’t legally married is important.

However, if she’s a Florida resident, Florida rules will matter in this scenario about the vacation condo.

Florida doesn’t have an inheritance tax, and it doesn’t matter where the beneficiary lives. For example, the state of New Jersey won’t tax a Florida inheritance.

Although New Jersey does have an inheritance tax, the state can’t tax inheritances for New Jersey residents, if the assets come from an out-of-state estate.

If she did live in New Jersey, there is no inheritance tax on “Class A” beneficiaries, which include spouses, children, grandchildren and stepchildren.

However, the issue in this case is the fact that her “daughter” isn’t legally her daughter. Her friend’s daughter would be treated by the tax rules as a friend.

You can call it what you want. However, legally, if she’s not married to her friend, she doesn’t have a legal relationship with her daughter.

As a result, the courts and taxing authorities will treat both persons as non-family.

The smart thing to do with this type of issue is to talk with an experienced estate planning attorney who is well-versed in both states’ laws to determine whether there are any protections available.

Reference: nj.com (July 23, 2020) “Will N.J. or Florida’s tax laws affect this inheritance?”

How Do I Handle Inheritance?

The loss of a close loved one can make it very hard to think clearly and function effectively. Add to that the fact that you may have to make important decisions about an inheritance, and it can be an overwhelming time.

Motley Fool’s recent article entitled “5 Considerations for Managing an Inheritance” discusses some ways to be a responsible steward of the money you’ve received and how to best integrate new funds into your larger financial plan.

  1. Stop and organize your thoughts. After the funeral or memorial service, take time to grieve and reflect on the loss of your loved one. You should also not make any sudden, large changes to your life, if you’ve inherited a considerable amount of money or a valuable asset. After some time has passed, you should speak with the estate’s executor or court-appointed administrator about next steps.
  2. Create a plan and act on it. While the executor is tasked with winding up the deceased’s affairs, you might ask if you can help with an inventory of his or her assets in the estate. This should include both probate (assets without a named beneficiary) and non-probate (assets with a named beneficiary). It’s helpful to make sure that you verify and then cancel your loved one’s subscription services and recurring household expenses (i.e., cable and electric). The executor will make that decision, but you may be able to help with some phone calls or emails to these companies. After the estate’s final expenses are paid, you should create an action plan and assign responsibilities. You’ll then be ready when the executor distributes the estate assets to heirs.
  3. Integrate to avoid mental accounting. After time has passed and you’ve received your inheritance, any new funds should be integrated into your own financial plan, as if it were earned income. If you don’t yet have a written financial plan, talk to a fee-only financial planner who charges by the hour or on a fixed-rate.
  4. Make certain that your financial priorities are met. Your inheritance creates a critical chance to possibly change the trajectory of your net worth. You might use it to pay off or reduce long-standing debts, like student loans. Build your emergency fund — at least six months’ worth of living expenses — that will cushion you from unforeseen circumstances (like this pandemic!). You should also make sure that Roth contributions are made for the year.
  5. Get creative! If you’ve inherited non-financial assets, like a car, artwork or antiques, you should make sure you know their value and decide whether you’ll keep or sell them. You might also swap an item with another heir, or if you aren’t ready to absolutely part with an inherited item, you might offer them to other family or friends. It can be nice to know that an unused item is being put to good use by people you know. Another option is to repurpose the item or donate it.

Losing a close loved one is difficult enough, but the need to wisely manage your inheritance will be a big task. Follow these steps to help with that process.

Reference: Motley Fool (Aug. 8, 20020) “5 Considerations for Managing an Inheritance”

What Does Pandemic Estate Planning Look Like?

In the pandemic, it’s a good idea to know your affairs are in order. If you already have an estate plan, it may be time to review it with an experienced estate planning attorney, especially if your family’s had a marriage, divorce, remarriage, new children or grandchildren, or other changes in personal or financial circumstances. The Pointe Vedra Recorder’s article entitled “Estate planning during a pandemic: steps to take” explains some of the most commonly used documents in an estate plan:

Will. This basic estate planning document is what you use to state how you want your assets to be distributed after your death. You name an executor to coordinate the distribution and name a guardian to take care of minor children.

Financial power of attorney: This legal document allows you to name an agent with the authority to conduct your financial affairs, if you’re unable. You let them pay your bills, write checks, make deposits and sell or purchase assets.

Living trust: This lets you leave assets to your heirs, without going the probate process. A living trust also gives you considerable flexibility in dispersing your estate. You can instruct your trustee to pass your assets to your beneficiaries immediately upon your death or set up more elaborate directions to distribute the assets over time and in amounts you specify.

Health care proxy: This is also called a health care power of attorney. It is a legal document that designates an individual to act for you, if you become incapacitated. Similar to the financial power of attorney, your agent has the power to speak with your doctors, manage your medical care and make medical decisions for you, if you can’t.

Living will: This is also known as an advance health care directive. It provides information about the types of end-of-life treatment you do or don’t want, if you become terminally ill or permanently unconscious.

These are the basics. However, there may be other things to look at, based on your specific circumstances. Consult with an experienced estate planning attorney about tax issues, titling property correctly and a host of other things that may need to be addressed to take care of your family. Pandemic estate planning may sound morbid in these tough times, but it’s a good time to get this accomplished.

Reference: Pointe Vedra (Beach, FL) Recorder (July 16, 2020) “Estate planning during a pandemic: steps to take”

Should I Let The State Write My Will?

It’s a common question asked of estate planning attorneys: “Do I Really Need A Will?” This article in The Sun explains that the answer is “yes.” If you die without a will or “intestate,” the probate laws of the state will determine who will receive the assets in your estate. Of course, that may not be how you wanted things to go. That’s why you need a will.

When you die, your assets (i.e., your “estate”) are distributed to family and loved ones in your estate plan, if there is no surviving joint owner or designated beneficiary (e.g., life insurance, annuities, and retirement plans). No matter the complexity, a will is a key component of the plan.

A will allows you make decisions about the distribution of your assets, such as your real estate, personal property, investments and any businesses. You can make donations to your favorite charities or a religious organization. Your will is also important, if you have minor children: it’s where you nominate a guardian to care for them if you die.

Of course, you can write your own will or pay for a program on the Internet, but it’s better to have one prepared by an experienced estate planning attorney. Prior to sitting down with an attorney, make a listing of all your assets (your home, real estate, bank accounts, retirement plans, personal property and life insurance policies). If you have prized possessions or family heirlooms, be sure to also detail these.

Make a list of all debts, such as your mortgage, auto loans and credit cards. You should also collect contact information for all immediate living family members, detailing their addresses and birth dates.

When meeting with an attorney, ask about other components of an estate plan, such as a power of attorney and medical directive.

The originals of these documents should be kept in a safe place, where they can be easily accessed by your estate administrator or executor.

You should also review your estate plan every few years and at significant points in your life, like marriage, divorce, the adoption or birth of a child, death of a beneficiary and divorce.

Do your homework, then visit an experienced estate planning attorney to receive important planning insights from their experience working with estate plans and families.

Reference: The (Jonesboro, AR) Sun (July 15, 2020) “Do I Really Need A Will?”

Why Should I Think about My Death?

Planning for the end of life isn’t about you, says NPR’s recent article entitled “End-Of-Life Planning Is A ‘Lifetime Gift’ To Your Loved Ones.” As the owner of the estate, you really don’t get to see the benefit of your estate planning. The NPR article gives us some easy and practical steps to planning for the end of life.

Name your executor. If you’re an adult, you should have a last will. This is because estate planning isn’t just for the rich. With a last will, you name an individual you trust to take care of everything when you die. That is the executor or personal representative. It’s a good idea to choose someone from your family or a person with whom you have a good relationship. This person also should have a good attention to detail, because an executor would have to locate all your financial assets and communicate with everyone you’ve named in your last will.

Conduct an inventory. Create a list of everything you own. This includes financial assets—such as bank accounts, retirement savings or car—as well as things that have sentimental value, like jewelry, furniture and mementos. Once this is done, specify in writing those persons you want to have these items. If you have young children, designate a guardian for their care, in case you and your spouse are no longer alive. This person will be responsible for your child’s schooling, health care decisions and value system. Digital accounts are also part of your property, such as your social media accounts, online photos, and whatever is in your Google Drive or iCloud. This also includes any online subscriptions and airline or credit card rewards. Create a secure list of all those accounts and the login and password details. Let your executor know where to find it. Make specific instructions about what you’d like to have happen with your online information.

Your decisions will change over time, so review and update your last will.

Think about your health care decisions. Your last will addresses what happens after you die. However, an advance directive is a legal document that addresses your health care and protects your wishes at the end of your life. There are two parts to an advance directive: a medical power of attorney, which is granted to someone to make decisions for you if you’re incapacitated; and a living will, in which you detail how you should be cared for by healthcare professionals.

Remember the emotional and spiritual aspects of death. The way in which you want to die is personal and about much more than just the medical aspect. It may be about being at peace with God or having your pets nearby.

Plan ahead to give you and your family peace of mind.

Reference: NPR (June 30, 2020) “End-Of-Life Planning Is A ‘Lifetime Gift’ To Your Loved Ones”

What Happens If I Don’t Fund My Trust?

Trust funding is a crucial step in estate planning that many people forget to do.

However, if it’s done properly, funding will avoid probate, provide for you in the event of your incapacity and save on estate taxes.

Forbes’s recent article entitled “Don’t Overlook Your Trust Funding” looks at some of the benefits of trusts.

Avoiding probate and problems with your estate. If you’ve created a revocable trust, you have control over the trust and can modify it during your lifetime. You are also able to fund it, while you are alive. You can fund the trust now or on your death. If you don’t transfer assets to the trust during your lifetime, then your last will must be probated, and an executor of your estate should be appointed. The executor will then have the authority to transfer the assets to your trust. This may take time and will involve court. You can avoid this by transferring assets to your trust now, saving your family time and aggravation after your death.

Protecting you and your family in the event that you become incapacitated. Funding the trust now will let the successor trustee manage the assets for you and your family, if your become incapacitated. If a successor trustee doesn’t have access to the assets to manage on your behalf, a conservator may need to be appointed by the court to oversee your assets, which can be expensive and time consuming.

Taking advantage of estate tax savings. If you’re married, you may have created a trust that contains terms for estate tax savings. This will often delay estate taxes until the death of the second spouse, by providing income to the surviving spouse and access to principal during his or her lifetime while the ultimate beneficiaries are your children. Depending where you live, the trust can also reduce state estate taxes. You must fund your trust to make certain that these estate tax provisions work properly.

Remember that any asset transfer will need to be consistent with your estate plan. Your beneficiary designations on life insurance policies should be examined to determine if the beneficiary can be updated to the trust.

You may also want to move tangible items to the trust, as well as any closely held business interests, such as stock in a family business or an interest in a limited liability company (LLC). Ask an experienced estate planning attorney about the assets to transfer to your trust.

Fund your trust now to maximize your updated estate planning documents.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

What Basic Estate Planning Documents Do I Need?

AARP’s recent article entitled “Sign These Papers” suggests that the following documents will give you and your family financial protection, as well as peace of mind.

Advance Directive. This document gives your family, loved ones and medical professionals your instructions for your health care. A living will, which is a kind of advance directive, details the treatment you’d like to have in the event you’re unable to speak. It covers things like when you would want doctors to stop treatment, pain relief and life support. Providing these instructions helps your family deal with these issues later.

Durable Power of Attorney for Health Care. This document, regularly included in an advance directive, lets you name a trusted person (plus a backup or two) to make medical decisions on your behalf, when you’re unable to do so.

Revocable Living Trust. Drawn up correctly by an experienced estate planning attorney, this makes it easy to keep track of your finances now, allow a trusted person step in, if necessary, and make certain that there are fewer problems for your heirs when you pass away. A revocable living trust is a powerful document that allows you to stay in control of all your finances as long as you want. You can also make changes to your trust as often as you like.

When you pass away, your family will have a much easiest task of distributing the assets in the trust to your beneficiaries. Without this, they’ll have to go through the probate process.  It can be a long and possibly costly process, if you die with only a will or intestate (i.e., without a will).

Will. Drafting a will with the guidance of an experienced estate planning attorney lets you avoid potential family fighting over what you’ve left behind. Your will can describe in succinct language whom you want to inherit items that might not be in your trust — your home or car, or specific keepsakes, such as your baseball card collection and your Hummel Figurines.

Durable Financial Power of Attorney. If you’re alive but incapacitated, the only way a trusted person, acting on your behalf, can access an IRA, pension or other financial account in your name is with a durable financial power of attorney. Many brokerages and other financial institutions have their own power of attorney forms, so make sure you ask about this.

These five documents (sometimes four, if your advance directive and health care power of attorney are combined) help you enjoy a happier, less stressful life.

In drafting these documents, you know that you’ve taken the steps to make navigating the future as smooth as possible. By making your intentions clear and easing the inheritance process as much as you possibly can, you’re taking care of your family. They will be grateful that you did.

Reference: AARP (August/September 2018) “Sign These Papers”

How Can I Avoid Family Fighting in My Estate Planning?

It’s not uncommon for parents to modify their first estate plans, when their children become adults. At that point, many parents’ estate plans are designed to help efficiently transfer assets to the surviving spouse and ultimately to the adult children. However, this process can encounter a number of hiccups and headaches.

Forbes’ recent article entitled “Three Steps To Estate Planning Without The Family Friction” explains that there are a number of reasons for sibling animosity in the inheritance process. The article says that frequently there are issues that stem from a lack of communication between siblings, which causes doubts as to how things are being done. In addition, siblings may not agree if and how property should be sold and maintained. To help avoid these problems, use this three-step process for estate planning.

Work with an experienced estate planning attorney. Hire an estate attorney who has many years of working in this practice area. This will mean that they’ve seen—and more importantly—resolved every type of family conflict and problem that can arise in the estate planning process. That’s the know-how that you’re really paying for, in addition to his or her legal expertise in wills and trusts.

Create a financial overview. This will help your beneficiaries see what you own. A financial overview can simplify the inheritance process for your executor, and it can help to serve as the foundation for you and your executor to frankly communicate with future beneficiaries to reduce any lingering doubts or questions that they may have, when they’re not in the loop. Your inventory should at least include the following items:

  • A list of all assets, liabilities and insurance policies you have and their beneficiaries
  • Contact information for all financial, insurance and legal professionals with whom you partner;
  • Access information for any websites your beneficiaries may need for your online accounts; and
  • A legacy letter that discusses non-financial items for your children.

Hold a family meeting. Next, conduct a family meeting that includes the parents and the children who will be inheriting assets. Some topics for this meeting include:

  • The basics of your estate intentions
  • Verify that a trusted person knows the location of your important estate documents
  • State who your executor and other involved people will be and your rationale
  • Make certain that all parties value communication and transparency during this process; and
  • Discuss non-financial legacy items that are important for you to give to your children.

This three-step process can help keep your children’s relationships intact after you are gone. Hiring an experienced estate planning attorney, creating a clear financial overview and communicating what’s important to you are critical steps in helping to keep your family together.

Reference: Forbes (July 2, 2020) “Three Steps To Estate Planning Without The Family Friction”

How Do I Incorporate Cryptocurrency into My Estate Planning?

Planning for cryptocurrency has been neglected. It means that, in some cases, the cryptocurrency has been lost. There have been people who tossed their computer hard drives with thousands of bitcoins (now worth millions). They then spend days sifting through tons of garbage. To save your family from this trouble and embarrassment after you die, add your cryptocurrency into your estate plan to preserve the benefits and avoid the risks of cryptocurrency.

Wealth Advisor’s recent article entitled “Estate Planning When You Own Cryptocurrency” says, first, you must preserve the benefits of your cryptocurrency.

Cryptocurrency is highly secure. However, that security is in danger, if the private key is carelessly recorded or discarded. With the private key, anyone can access the cryptocurrency. As a result, your planning and procedures must address how to secure this information. Just like cash, cryptocurrency isn’t traceable. In fact, there’s no electronic or paper trail connecting the parties in a transaction involving cryptocurrency. Therefore, in order to preserve that privacy, you’ll need to plan so the other documentation in the transaction doesn’t reveal these identities, or at least keep that information privileged. Remember that transferring cryptocurrency takes only seconds.

Because cryptocurrency, like precious metals and other commodities, can fluctuate wildly in value even during the course of a day, it must be treated like stock in a private company and other assets that are volatile in nature. Cryptocurrency also isn’t subject to government regulation, so no government is responsible for losses from fraud, theft or other malfeasance.

Trusts and other planning devices have a tough time with cryptocurrency, especially if the Prudent Investor Rule applies. Without specific language, the trust won’t be capable of holding cryptocurrency. If that language is written too broadly, the trustee may be exempt from damages due to willful neglect.

Cryptocurrency is also taxed as property not as currency by the IRS, which means that the fair market value is set by conversion into U.S. dollars at “a reasonable exchange rate” and transactions involving cryptocurrency are subject to the capital gains tax regulations. As a result, you must have specific tax provisions in trusts, partnerships, LLCs, and other entities. Therefore, if you, or your business, own bitcoin or any other cryptocurrency, your estate, business succession, and financial plans need to address it specifically. Ask an experienced estate planning attorney for help.

Reference:  Wealth Advisor (August 4, 2020) “Estate Planning When You Own Cryptocurrency”