The Estate Planning Thread

[dstark]

@AttorneyMother,

http://www.howtoprobate.com/probate/do-i-need-probate/non-probate-assets/community-property-with-right-of-survivorship/

For Income Tax purposes, both the decedent’s and the surviving spouse’s one-half community property interest will receive a full step-up in basis to the fair market value at the date of death if the property is held as CPWROS. AKA – Very good news! However, unlike a Living Trust, the surviving spouse will not receive a step-up in basis upon his or her passing. Additionally, since the surviving spouse is now the sole owner of the property, a “community property” interest no longer exists, as there is no “community”. If left unchanged, the real property previously held as CPWROS will likely need to go through Probate.

As you can see, CPWROS is a tool for short-term planning, where a Living Trust is much more powerful and efficient for long-term planning.

What does this mean as far as a stepped up basis?

I get this…

Husband and wife…buy a property for $100,000 using CPWROS as the title. Wife dies when the property is worth $300,000 so the basis is $300,000. The husband can sell the property for $300,000 without a cap gain tax.

For Income Tax purposes, both the decedent’s and the surviving spouse’s one-half community property interest will receive a full step-up in basis to the fair market value at the date of death if the property is held as CPWROS.

Huh? The following doesn’t make sense to me.

AKA – Very good news! However, unlike a Living Trust, the surviving spouse will not receive a step-up in basis upon his or her passing.

First off…the surviving spouse is dead so why would he receive a stepped up basis at his own death? So who doesn’t receive a stepped up basis? And in my example, does that mean if the $300,000 property is worth $1 million at the surviving spouse’s death, the heirs have to pay cap gain taxes on $700,000?

[dstark]

http://www.forbes.com/sites/deborahljacobs/2014/02/12/freebasing-your-estate/

Aside from the hassle factor of a trust, the “tax drag” of having assets in a trust is now greater than before. Assets in a regular bypass trust won’t get a step-up in basis at the death of the second spouse. In addition, unless trust income is distributed, the income tax penalty can be huge. That’s because a trust hits the highest income tax bracket once it has more than $12,150 of taxable income. In contrast, a single individual doesn’t hit this bracket until his taxable income is more than $406,750.

[AttorneyMother]

@dstark ,

I try to read more than one source when I’m trying to figure out the issues but I don’t think that CPWROS is that complex, based on what I understand. Although I’m aware of it, I’m not at all familiar with the CA form of CPWROS, so you should talk with local counsel. There may be other reasons for the CPWROS unique to CA.

If you go back to the IRS publication (which is intended to be the more user-friendly version of the applicable tax law), then here’s how I understand the situation.

Scenario 1:

– in a community-property state, H&W own a house they purchased for $100,000
– the house is CP (titled however that is required to be titled in the state)
– H dies when the house is worth $1,000,000
– W succeeds to ownership of house by operation of law
– W’s basis in the house = $1,000,000
– W wills the house to children
– when W dies, the house is worth $1,500,000
– the children’s basis in the house is $1,500,000

Scenario 2:

As I understand it, the difference is evident in the following scenario:

– in a common-law state, H&W own a house they purchased for $100,000
– the house is owned JTWROS
– H dies when the house is worth $1,000,000
– W succeeds to ownership of house by operation of law
– W’s basis in the house = $50,000 + $500,000 <-- this is my “lawyer’s math”
– W wills the house to children
– when W dies, the house is worth $1,500,000
– the children’s basis in the house is $1,500,000

Scenario 3:

Here’s a different scenario regardless of the type of state:

– H owns a house he purchased for $100,000 and it is held in his name only
– H dies when the house is worth $1,000,000
– in his will, H devises his house to W
– W’s basis in the house = $1,000,000
– etc.

That website’s language you quoted as it relates to a Living Trust and the step up in basis is misleading. But clearly once the W owns the house in Scenarios 1 and 2, the house has to pass via a will or by intestacy UNLESS the house is conveyed to a LT. That language is both correct and a sales pitch for LTs as a means of avoiding probate.

[AttorneyMother]

@dstark, as I understand them, “bypass trusts” are not the same as living trusts.

Living trusts are revocable and the grantors are able to move assets in and out while they are alive, so LTs are not separate taxable entities. Check with your CPA.

[AttorneyMother]

@dstark, Also, do not confuse avoidance of probate with having to “clean up” title to the extent that the W or the children can easily sell the house.

Assuming that in Scenarios 1 and 2, the W just carries on after H’s death without changing the title to the house, it will be necessary for her to engage in some legal clean up work (to clarify the chain of ownership) so that when she sells the house, she is able to execute a deed of title in her capacity as 100% owner.

[AttorneyMother]

Remember this post in the Retirement thread? This is the main difference.

– if the asset has been settled into the RLT, then the RLT has title to the property and “owns” it
– the present Trustee is the individual who has legal power to act on behalf of the RLT
– so…so long as there is a Trustee (the original Trustee or any sucessor Trustee appointed in accordance with the terms of the RLT), that individual can act on behalf of the RLT
– one of the (supposed) purposes of having an RLT is to avoid the problem of title transfer upon the death of the beneficiaries of the RLT, which, in your example, are normally the spouses who were the original title owners of the real property

For example:

– H&W transfer title of House to RLT (properly recorded in the deed records)
– RLT now holds title to House
– both H and W are trustees of RLT
– H dies but RLT still holds title to House
– W is still one of the trustees of RLT
– W wants to sell the house
– W can act as trustee on behalf of RLT to convey title of House
– no “probate” of H’s will or administration of H’s estate is required to transfer title of House
But, generally:

– if the asset has been settled into the RLT, then the RLT has title to the property and “owns” it
– the present Trustee is the individual who has legal power to act on behalf of the RLT
– so…so long as there is a Trustee (the original Trustee or any sucessor Trustee appointed in accordance with the terms of the RLT), that individual can act on behalf of the RLT
– one of the (supposed) purposes of having an RLT is to avoid the problem of title transfer upon the death of the beneficiaries of the RLT, which, in your example, are normally the spouses who were the original title owners of the real property

For example:

– H&W transfer title of House to RLT (properly recorded in the deed records)
– RLT now holds title to House
– both H and W are trustees of RLT
– H dies but RLT still holds title to House
– W is still one of the trustees of RLT
– W wants to sell the house
– W can act as trustee on behalf of RLT to convey title of House
– no “probate” of H’s will or administration of H’s estate is required to transfer title of House

[dstark]

@AttorneyMother

Thanks. I understand everything you wrote.

The Huh section… I never heard of that.

I am always reevaluating. I did not realize how income in Special Need trusts sre taxed. This effects what I want to do with my estate.

I may change a few things because of this.

Also… Schwab said to not use my rlt as a beneficiary with my ira. I am going to look into that.

[AttorneyMother]

@dstark, like with everything, there are competing interests. You and I have different priorities, and others will also. And priorities change over time and life circumstances. However, as we’ve discussed, planning has to account for the “what if” worse-case scenarios. That’s the lawyer’s job and it’s unpopular. It makes me think that it’s best to prepare the people well also. If the planning is too complex, and the parties do not understand, that’s when they become too reliant on lawyers and CPAs to help them sort things out. There are legal issues and financial issues.

I would not name the RLT unless it qualifies as a pass-through “conduit” entity, if that’s what you want, to minimize RMDs and income taxes on distributions. It also depends on whether you want it to accumulate or conduct the distributions from your IRA.

Have you seen the Kitces article about trusts as beneficiaries for IRAs?

ETA:

Trusts for IRAs: https://www.kitces.com/blog/qualifying-a-see-through-trust-as-an-ira-designated-beneficiary-conduit-or-accumulation/

Trusts for annuities: https://www.kitces.com/blog/the-problem-with-naming-a-trust-as-the-beneficiary-of-an-annuity-and-using-a-beneficiary-designation-with-restricted-payout-form-as-an-alternative/

[AttorneyMother]

I’m sharing some information from a friend who lives in CA about transferring title of real property to a living trust:

You also file a Preliminary Change of Ownership Report with the county recorder; the key is to be sure that you check the right boxes so you are exempt from transfer taxes and reappraisal under Prop 13. I actually contacted the mortgage servicer first, who wanted to see the key pages of the trust and the proposed transfer deed. After I had their approval I filed, and then sent them back a copy of the newly recorded title. I then added an endorsement on my title policy and told my home owner’s insurance company. Mortgage, property taxes, insurance, all are in the name of the trust.

Some or all these steps may require the assistance of an attorney depending on your expertise and sophistication.

[AttorneyMother]

Lovely, I just saw the duplication in the quoted part in Post 245 above. CC has had problems for me.

And it’s too late to edit, but you get the picture and the lesson twice!

[AttorneyMother]

@dstark, here is a great CA-specific discussion of probate v. LT in Alameda Co. I can’t imagine it’s significantly different in Marin Co.:

http://www.alameda.courts.ca.gov/pages.aspx/Probate-a-Decedents-Estate

http://www.alameda.courts.ca.gov/Pages.aspx/Living-Trusts-and-Estate-Planning

[dstark]

@AttorneyMother, thanks. I think post 250 might be a little too much information for me. I get it.

Because of my circumstances, I have a couple of issues most people don’t have. The issues I mentioned I want to understand. I was not told about the taxation of the special needs trust. This is pretty much it for me. Everything else is good. My IRA is set up ok.

A friend of mine has a disabled brother. He is a smart guy. He has lawyers. He has a cpa. He is not going to use a special needs trust.

Of course, his brother is more likely to die first.

My next step is to talk to my estate attorney.

[Iglooo]

The higher tax on irrevocable trust is if the income is not distributed to the beneficiary. If the income is distributed to the beneficiary, the beneficiary would pay tax at the personal income tax rate. Most of the time, trustees of an irrevocable trust will distribute the income to the beneficiary for that reason.

[Marilyn]

I’m so glad this thread got revived since suddenly I’m involved with my mother and father’s trusts - Mom just passed away; Dad 18 years ago. They (especially Mom) were very well organized and there aren’t any real issues other than my very busy brother. We are both co-trustees under both trusts; no one else involved in decisions. I knew nothing about how all this works so have been on an extremely sharp learning curve!

Mom had just about everything in her living trust (except her IRA; got that all properly handled) so technically it all moved into her irrevocable trust. We got an EIN and are in the process of retitling all of her mutual funds/money markets/cash accounts into the irrevocable trust. After that I will have the option of splitting my half out into my own name, liquidating, transferring in kind, etc.

Two main questions; one just to confirm and one info seeking.

-we are retitiling the accounts as the “Marilyn’s Mom Irrevocable Trust”. Can I presume no other language is needed in the title of the accounts?

-Mom had a large sum of Series EE and I savings bonds in a safe deposit box in the name of her living trust. I’ve read that if they are not matured, they can be retitled to my brother and myself (we can split them; there are a lot of smaller denominations). Bro does not want capital gains at this time and I want to control them (lots of built in cap gains in my Dad’s trust) so it would be nice to just switch them over. Is this actually correct, and where would we go to do this?

We also have to figure out what to do with my dad’s German WWII “souvenirs” (he was a chaplain but these are not peaceable items). Bro is working on the legality of one of the souvenirs…

[AttorneyMother]

@Marilyn, feel free to PM me if you want to discuss more specifically.

[Marilyn]

@AttorneyMother - thanks, I’ve pm’d

[mathmom]

Reviving this thread again. I need to read it and haven’t. My mother passed away and I’m um… a lot richer than I was a few months ago. It’s pretty clear to me that our simple wills won’t cut it. What I’d like is some book recommendations before I talk to the guys who have been looking after my Mom’s money, so that I speak the language. I’m really allergic to reading about money. I have zippo interest in it. (Though I was always quite good at saving money.)

Twenty years ago I read Jane Bryant Quinn’s* Managing your Money in the 90’s * and found it a helpful read and generally easy to follow. I’d like the equivalent, but with more about how to deal with end of life planning as well. Any suggestions? And I will read the thread soon!

[MomofJandL]

Jane Bryant Quinn has a new book called How to Make Your Money Last that might have the right focus for you as you consider how to incorporate these new financial assets. If you are looking at your own estate planning, Beyond the Grave by Gerald Condon is a very approachable book to help you think through how you want to pass this money down to your kids if you don’t spend it all in your lifetime. It’s always a good idea to have your thoughts collected about what results you want to achieve before you start talking to the money managers and attorneys.

Do you want to merge it with your marital finances, or keep it separate? Leave it to your DH in your will or pass it to your kids? If you die tomorrow are you ok if your DH re-marries, and leaves your mother’s money to his new wife’s kids?. Worried about whether your kids will lose it to creditors or ex-spouses, or leave them to deal with it as they choose? Lots to think about.

FIL had his will and trust drafted to protect his assets from his kids-in-law. In our family, DH will keep the assets separate and list the kids as beneficiaries, because we don’t really need the money. (Although I’d love for him to blow it all on performance cars and luxury travel, just to poke FIL in the eye for being such a darn miser his whole life. But that won’t happen.) The other siblings will circumvent those protections in a heartbeat for various reasons.

[mathmom]

I wouldn’t mind DH having some of the money, even if he remarries, but I’d like the bulk of it to go to the kids. They are not big spenders. Neither is married, younger one has a girlfriend who we like and seems to pinch pennies even more than he does. Yes, all good questions. Thanks for the book suggestions, I didn’t realize Quinn had a new book.

[mathmom]

@AttorneyMother just discovered you’d replied to a post, but I’d been busy avoiding this thread. Oops.

If I were you, I’d want to start by making sure the complicated real estate ownership is “understood” by your children so that your heirs know precisely the nature and extent of your ownership interest. If you and your H are in a community property state, your fractional interests are affected by each spouse’s community share first, then you’d want to make sure your children get what they are entitled to. Your heirs should also understand the extent of their liabilities relating to ownership of the properties. The attorney who structured your real estate deals is a good starting place for referrals to a good wills and estates attorney.

Actually step one is making sure the complicated real estate is understood by us.

There are three funky pieces of property, in three different states. One I believe is in a trust with my three brothers - I signed something last year to that effect. It’s either worth $15,000 or a million depending on whether we win our law suit with the state of FL. (Lost, then won appeal, then lost - this has been going on for 10+ years.) None of us really care that much, but obviously it would be nice to sell it for the bigger number. Then, here’s a place on the Cape that we own 7/15th of. Nice piece of land, mostly marsh, an unwinterized cabin and dock on the water. That’s the one we had the meeting about last year. My aunt seemed to think that my mother was on board to give us 21 years to use the cabin and then the place would be given to a Conversation Trust. We didn’t think my Mom was really aware this was the plan and now she’s gone. Apparently we three kids can stop the plan, or at least modify it. Don’t mind the bulk of the land being given away, but really, really, don’t want to lose the house. And 21 years means our kids lose it. Finally, here’s a third piece of property that is set up with shares. About 100 owners. We have a cabin on land with a 99 year lease. We think. Even our estate lawyer isn’t sure how this one works!