Monday, January 30, 2012 Gifting the House For $1: Good Idea or Not?
Many people ask us if it is a good idea to give their home to their children. While it is relatively easy to do, giving away your house can have major tax consequences, among other negative results.
GIFT TAX ISSUES: When you give anyone property valued at more than $13,000 in any one year, you have to file a gift tax form. Also, under current law you can gift a total of $5.12 million over your lifetime without incurring a gift tax. If your residence is worth less than $5.12 million, you likely won't have to pay any gift taxes, but you will still have to file a gift tax form. Congress may change the gift tax exemption, which is now scheduled to revert to $1 million in 2013 unless Congress acts.
CAPITAL GAINS TAX ISSUES: While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.
Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property's tax basis would be "stepped up," which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.
PA INHERITANCE TAX ISSUES: In Pennsylvania, there is no gift tax. However, to avoid PA Inheritance Taxes (the rate is 4.5% for assets passed to children or grandchildren), you must live at least one year from the time the gift was made. Often times, 4.5% of inheritance tax is worth paying rather than gifting the house in this manner, due to the risks involved.
ASSET PROTECTION ISSUES: By transferring your house to your children, you are making all of their future financial and family problems YOUR problems. That means the house could end up being taken away due to creditor problems, bankruptcy, litigation, or divorce. Would you want your son-in-law to get part of your house while you're still living?
MEDICAID/LONG-TERM CARE ISSUES: Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult with an elder law firm such as our law firm, where we can advise you on the best method for passing on your home.
CONCLUSION: "Gifting the house for $1" is a phrase that's tossed around quite a bit, and several families go ahead with this planning. As you can see, casual planning like this is fraught with potential landmines. Be careful. There are options out there to transfer the house properly. Speak with an estate planning or elder law attorney about this type of planning.
Tuesday, December 06, 2011 Asset Preservation: Your HOME
Preserving your assets is possible even if you are about to enter into a nursing home. But the worst thing you can do is wait until you're no longer healthy to start planning. Instead, start planning while you are healthy!
Like most people, if you own a home, typically that's your greatest concern when you sit down to consider what assets are most in need of protection.
Consider an example: Jon and Mary, both 68, own a $250,000 home. They have two children. Neither has long-term care insurance. Jon's health is a source of concern, but his doctors are confident that based on current information, he will not need long-term care for at least another 7-10 years. This presents a great opportunity to plan in advance.
With our customized Nursing Home Protection+ Account solution, we can protect Jon and Mary's home from ever being taken if Jon goes into a nursing home. Even better, when Jon and Mary both pass on, the house won't be subject to estate recovery. In other words, their two children will be able to inherit the house, even if Medicaid wants to re-coup their costs by taking the house.
This type of asset preservation requires special skills and must be done carefully after considering many factors.
If you're interested in this type of planning, please contact our office today.
Tuesday, May 17, 2011 50/50
As an estate planning attorney, I hear about some of the craziest, outrageous estate planning matters gone awry. But those types of cases are outliers, and although they’re interesting, they’re uncommon. It’s the typical case gone wrong that really causes problems for more families.
For instance, in one relatively straightforward estate planning matter, I have a colleague who is currently representing a sister who is being sued by her sibling (brother) over some real estate their parents left them. When their parents died, they left their two children the house as equal owners – 50/50. The parents insisted that the children never had conflicts, and that the family was close. They couldn’t imagine how this simple matter could be anything but straightforward.
However, the client’s brother unfortunately got laid off in the recession, after having a secure job at a pharmaceutical company for many years. As a result, he could no longer afford his share of the expenses of the house. and needs to sell the real estate. The client doesn't want to sell as she feels they would take a big loss, as the housing market still has not turned around in many parts of the country. She would rather wait until the real estate market has recovered. Oh, and by the way, the parents named the two children as Co-Executors, something we always caution clients against doing.
Since they cannot come to an agreement, the brother sued the client to compel the property to be sold. The parents are probably rolling over in their graves, as the two siblings duke it out in court. Guess who wins? Attorneys, who spend plenty of time on cases like these and rack up many billable hours. It may take years for this family to recover from hard feelings and the conflict. Sadly, none of it needed to happen.
If you are leaving any property to your family after you are gone, talk to your estate planning attorney about establishing provisions in your will or trust to ensure that this never happens. Some ideas including setting money aside to handle the expenses (for many people, life insurance is an excellent option in a case like this). As I always say, none of us have a crystal ball, and you simply don’t know what will happen after you’re gone. Your estate plan needs to be crafted in such a way that takes into account multiple scenarios, and most importantly, the worst case scenario so that such a scenario can be avoided.
50/50 doesn’t seem so great after all. If your plan needs a fresh look, or if you know of someone who can use some assistance with estate planning, please call our office today at (215) 706-0200. Monday, January 24, 2011 Types of Ownership
Joint ownership? Tenants in common? Right of survivorship? For many people, it is easy to get confused about how property is owned. This week, we put together a quick guide for different ways to own property.
Our office regularly helps clients record property deeds for real estate and real property. We find it is important to educate our clients on the various ways that one can own property. There are tax advantages or disadvantages for every situation, which we will not be exploring today.
Joint Ownership With The Right Of Survivorship: (JTWROS) A common way to own real estate, two or more individuals own one piece of property together. All joint owners own the whole property (in other words, not easily partitioned). When one joint owner dies, the other owner automatically inherits the decedent’s share (survivorship). The decedent’s Will won't control how his or her share is distributed in this case, thus avoiding probate.
Tenants In Common: Two or more individuals own a share of the property. The property is easily partitioned. For example, you own 50% (the east side) and I own 50% (the west side). Upon death, the tenant in common’s share is passed through his or her Will. The advantage is that this type of property is easier to divide/partition, but doesn't avoid probate.
Tenancy By The Entirety: This is similar to Joint Ownership with Right of Survivorship above, but it reserved for legally married couples. This type of ownership offers additional creditor protection for the married couple. This method of ownership avoids probate.
Payable On Death (POD)/Transfer On Death (TOD) Accounts: These types of designations are typically found on a bank account or other financial account. An individual owns the property while he or she is living and has full control over it. The POD or TOD beneficiary only has access to the account upon the owner’s death. The advantage is that it passes directly to a person, and not through the Will, thus avoiding probate.
Life Estate: Used for real property, allows an individual to have a right to live in a property while he or she is living, but another person retains ownership interest. Can be advantageous for seniors, and for several situations, but you must be careful in setting up a life estate.
It’s important to know how your property and assets are titled, and who owns what. Whether it’s jointly held or not makes a big difference, for inheritance, planning and tax purposes. A good estate planning attorney always asks the client about how property is owned, and if the client doesn’t know, the attorney helps the client find out.
To schedule a consultation to review your estate plan, call us today at (215) 706-0200. Monday, November 22, 2010 Pennsylvania Inheritance Tax 101
When you die in Pennsylvania, any property or assets that you leave to other people is subject to an “Inheritance Tax.” This is in addition to possible federal estate taxes (more on this in the coming weeks).
Typically, but not always, the Executor of the estate pays the inheritance tax on behalf of all beneficiaries of the estate before any of the property is distributed to beneficiaries.
Pennsylvania mandates that inheritance tax be paid 9 months after the decedent dies. You can get a discount if you pay within 3 months.
The PA Inheritance Tax rates for 2010, 2011 and beyond (at least as of now) are:
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0% -- Legally married spouses
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4.5% -- Children, Grandchildren
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12% -- Siblings
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15% -- All others
Most property is subject to inheritance tax. Jointly owned property is taxed at the share the person owned (i.e., if a person owned 50% of a property, that 50% share would be taxable).
One way to avoid inheritance tax in PA is to establish an irrevocable trust, or simply gift assets (unconditional giving, no strings attached) to someone. You must outlive them at least one year in order for the gift or trust to be complete so that no inheritance tax is due on that property.
Be careful what you gift to someone. If you gift someone a house, and you still want to live in it while he or she owns it, you could be making a risky move, especially if that person gets in trouble.
We would advise you not to do any inheritance tax planning without the assistance of a qualified estate planning attorney. Please call our office today at 215-706-0200 to schedule a complementary appointment. Have a wonderful Thanksgiving holiday! Monday, August 23, 2010 Comprehensive Estate and Retirement Planning
An estate plan completed by a law firm, by itself, is simply the legal documents that are drawn up to make sure your wishes are valid when you become incapacitated and when you die.
However, an effective estate plan should be part of your overall retirement plan and wealth management plan.
When our clients want to make sure their estate plan is seamless with their retirement plan, income plan and tax plan, we work with Franklin Retirement Solutions, a firm that specializes in retirement planning. Together, we can make sure all of the pieces of your plan fit together.
Here's just one of many examples of how a "piece meal" plan can go wrong: Client X has a financial advisor, who doesn't know the estate planning attorney. Client X has a special needs child. Client X asks attorney to protect assets for the special needs child, and attorney drafts both a will and sets up a special needs trust. Client X dies, and estate realizes that assets were not allocated properly (as a special needs child, putting assets directly into this child's name is a really bad idea). Client X's financial advisor was not aware of rules for special needs persons that are on public benefits. As a result, Client X's son almost lost his public benefits.
By combining your financial planning and estate planning, your plan becomes a lot more effective. Most of our clients love having access to a financial planner, tax planner, Medicare supplement/Long-term care insurance specialist, and more.
To summarize, here are a few advantages of planning with this approach:
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All parts of your plan work together
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Ensures your plan will be reviewed and, if needed, updated more often
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Provides a more seamless transition to your heirs, since your affairs are in order.
We find that this type of planning is extremely beneficial to middle class clients. To learn more about our comprehensive approach to estate and retirement planning, please give our office a call today at (215) 706-0200.
Tuesday, July 27, 2010 Should I Transfer My Home To My Kids Now?
Have you heard advice that you should sell your house to your kids now for $1? We advise you to schedule an appointment with us before you re-title property in your children's names.
Here are the reasons why you should reconsider this option and consider alternatives:
* Inheritance Taxes: Many people are under the impression that Pennsylvania Inheritance Taxes are more than they really are. Upon your death, property that is transferred to your lineal heirs (children) is taxed at a minimal 4.5% rate, that has remained steady for years and is not expected to change.
* Step Up In Basis: By gifting your property to your children for $1, you could potentially be giving them more of a tax burden if they end up selling the property later. Be careful.
* Your Children Will Own The Property: Let me repeat that. Once you gift your home to your children, your children will own the property. Even if you are a joint owner with your children, they will still own a share. The question becomes.... What if your child gets in trouble... What if your child gets divorced... What if your child goes through bankruptcy... If you don't think it could happen to your family, you are playing the odds.
There are other reasons why you should re-consider jointly titling property.
If you are seeking to avoid probate, you may want to set up a revocable living trust, which is a way to avoid probate. Keep in mind that probate is relatively simple in Pennsylvania and not as costly for the most part. If you are not concerned about probate (and you probably shouldn't be), then using a will to convey your house is a good option.
If you have multiple homes (i.e., home in Pennsylvania, vacation home in New Jersey or Florida), you should strongly consider setting up a living trust. This will avoid ancillary probate (probate in other states), which could be a real hassle.
Remember: Your estate plan is important, and there is no "simple" estate plan. Make sure you consult with our firm before you deed your property to your kids. Let us help you explore your options. To schedule your complementary consultation, call our office at (215) 706-0200 or email us at info@jawatlaw.com |