Kansas and Missouri Estate Planning

Why Might I Consider a "Life Estate" for My Home?

Life estates may be useful for your family.

When it comes to estate planning, there are numerous tools at your disposal.

Some, like a last will and testament, are essential.

Others are optional.

These optional tools are dependent upon both goals and circumstances.

A recent nj.com asks “How does a life estate work to transfer a home to a child?”

How does a life estate work?

A life estate essential allows a homeowner like you to hold rights to your home while transferring ownership to your child.

What rights do you retain, as a result?

You would have the right to reside in the property.

Your child cannot evict you.

Your child has no right to live in the property.

Sure, you can allow the child to live with you, but you are not obligated to do so.

All that noted, your rights do come with responsibilities.

What are they?

You must pay the regular maintenance, repairs, and property taxes.

Can you move out?

Yes.

If you rent the home rather than sell, the rental income will be yours.

What if you sell the house before you die?

You will receive some of the proceeds and so will your child.

Your portion will be free from income taxation.

Your child will owe taxes on any capital gains.

What happens if you die?

The life estate will end.

All rights and responsibilities now belong to your child.

In addition, the property will receive the step-up in basis.

Consequently, if your child sells the property, the capital gain or loss is calculated based on the the value at the date of your death and the date of sale.

If you have owned the home for many years, this could be a significant tax benefit.

There are a number of valid ways to pass along a home.

Discuss your options with an experienced estate planning attorney to determine what will be the best choice for your situation.

Reference: nj.com (July 12, 2019) “How does a life estate work to transfer a home to a child?”

What Estate Plans Should be Made for My Parent's Family Home?

Selling a home can be an ordeal at any stage of life.

Selling a home is no small task.

It involves cleaning, repairs, and moving your things from the space.

According to a recent The Washington Post article titled “With proper planning, selling a parent’s house can be a relatively painless process,” the process can be further complicated.

How so?

You could be selling home on behalf of a deceased loved one.

In addition to the normal activities associated with putting a home on the market, you will be in a state of grief.

Can the process be simplified?

Yes.

If your parents have not yet died, encourage them to get their estate planning affairs in order.

Including their home in the planning sooner rather than later will make the process proceed more smoothly.

If each of your parents do not have a last will and testament, they should begin there.

Understand money will need to be spent in the process of selling the house.

There will be minor repairs and property maintenance.

After your parents die, you should promptly make sure the property is secure.

This involves changing the locks.

By doing so, you will protect the property from both vandalism and theft.

And not all thieves are "strangers," if you know what I mean.

You should have the property valued and appraised by a professional.

Before the house goes on the market, all personal belongings should be removed.

Remember homes just sell better when well presented.

Landscaping and staging should reflect the livability of the home.

"Curb appeal" is real.

Selling a home is a process and communication is key.

The executor should serve as the point person for updating the family members on the progress of that process.

Taxes should be considered when selling a home.

This includes any inheritance, estate, and income taxes.

To minimize estate taxes, it is often advisable to do so as soon as you receive the rights to the property.

Why?

The “step-up” in basis excludes capital gains taxes on the sale of the home, if the sales price does not exceed the date of death value of the home.

In some situations a trust may be beneficial as it can simplify administration and minimize family conflict.

Working with an experienced estate planning attorney can help your family create a plan to best meet the goals of your family for the family home.

Reference: The Washington Post (May 16, 2019) “With proper planning, selling a parent’s house can be a relatively painless process”

What are the Tax Consequences of an Inherited Vacation Home?

Fair market value will influence taxes on a property.

Do you own a vacation home in another state?

Are you wanting to pass it to your children when you die?

Many people choose to leave vacation property to their children rather than sell.

After all, you and they may have made a lot of memories and invested a lot of laughter in the walls there.

According to a recent nj.com article titled “Cost Basis for and Inherited Vacation Home,” you may want to take taxes into account on the property.

How do you do this?

You must first find out if the inherited property is taxable.

This is determined by the basis on the property.

This is usually done in one of two ways.

The first method is to use the fair market value on the date the decedent passes away.

The second method is to use the fair market value on the alternate valuation date should the executor of the estate choose to do so.

The inheritor can get the fair market value from the executor of the estate.

In fact, in some instances the executor is required to provide the fair market value to the beneficiary of the property.

What if you own only a portion of the property when you die?

Only this portion may get a step-up in basis.

Does a step-up in basis depend on whether you owe federal or state estate or inheritance taxes on the property?

No.

Even so, the value of the property reported by your children as their basis must equal the value reported on the federal estate tax return.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: nj.com (July 24, 2018) “Cost Basis for and Inherited Vacation Home”

Tax Planning Challenges for Wagon Pullers

With more folks "riding in the wagon" than "pulling the wagon" these days, those pulling the wagon are having to pull harder with higher tax income tax rates. Remember: all taxation is political. While the government is devouring more revenue from the economy and seeking to "spread around the rest," there are some practical steps "wagon pullers" need to mind to keep what they can.

But first, consider the following:

Did you know the top bracket is 39.6 percent for singles making $400,000 and marrieds filing jointly making $450,000? In addition, did you know there is a 3.8 Medicare surtax on net investment income if modified AGI is more than $200,000 for singles and $250,000 for their married counterparts?

But wait, there is more.

Did you know there is a 0.9 percent Medicare payroll withholding tacked on to the incomes of people earning $200,000 if single and $250,000 if married?

"The trouble with Socialism is that eventually you run out of other people's money" — Margaret Thatcher

I confirmed this quote on Snopes.com. 

I digress. [What else is new, if you are a regular reader of this blog.]

So, what is a "taxpayer" to do?

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. For example, if you see a trend, such as an increase or reduction in your income, you can alter your deductions or deferrals. 

Watch out because investment income is taxed as ordinary income. Your returns could bump you into the higher categories if you are right on the edge of a bracket fault line.

On the other hand, to avoid adding to your tax burden, be mindful to leverage tax-sheltered accounts—including 401(k) plans and IRAs. Why? When you place funds in a retirement account, then there is no taxation owed until the funds are withdrawn.

Even better, in the case of Roth IRAs no tax will ever be owed after the contributions are made! Sweet.

A higher estate-tax exemption, currently at $5.43 million per taxpayer in 2015, means fewer people pay the federal estate tax now. That is a bit of good news. Consequently, 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, in the times of political and economic uncertainty, you may need your resources for medical expenses and even later in life care.

From an income tax and estate planning perspective there can be some real advantages to retaining appreciating assets inside your estate? Why? Because your heirs would enjoy a stepped-up basis when they inherit.

For instance, if an asset grows from $100 to $1,000 during your lifetime, then the basis will reset for your heirs when they inherit it. The asset will have a new basis - the value on your date of death.

When the heir sells the stock, his or her capital gains tax will be limited to any increase in value after your date of death. Alternatively, if you were to gift the asset to the same heir during your lifetime, then his or her basis is your original basis. Not good.

If you want to keep more of your hard-earned assets and those you have inherited through the wise stewardship of your family line, then consult with an experienced estate planning attorney.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website. 

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