<p>What happens if the lifetime gift/inheritance exclusion is reduced in the future after one has gifted in excess of the new amount? I seem to recall my tax preparer say she had a crazy year when there was effectively zero estate tax. Wealthy families were transferring significant assets and filing gift tax forms, I don’t think they can apply a new law retroactively, but stranger things have happened with the IRS. </p>
<p>We already gift the maximum to our kids and have for years, but never thought about the scheme @cbreeze mentioned. If these sort of transactions are monitored by the IRS, doesn’t that look like an obvious attempt to get around the law? I would worry that it could flagged and my kids have an issue to deal with after my demise. We also have various trusts in place…including GRATs, which are particularly advantageous for long-term planning. Basically, the assets in the GRAT are not subject to estate taxes because the grantor retains ownership of the trust. This is especially useful for assets that you expect to appreciate significantly in value - often people with ownership in businesses use GRATs to transfer those assets. </p>
<p>Basics about GRATs: <a href=“What Is a Grantor Retained Annuity Trust (GRAT)?”>http://wills.about.com/od/overviewoftrusts/qt/grantorretainedannuitytrust.htm</a></p>
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<p>Remember, it depends on the asset, you can gift cash & you could even gift a life insurance policy on which you continue to gift the premiums, but if you gift real estate then you are gifting that asset at your basis. SO, if you bought a home in 1970 for $50k and now it is worth $500k or even $5MM, if you gift it, the heir has a basis of $50k (plus improvements); if your kid gets it when you die, they get a stepped up basis, so the current market value at death (there are two dates they can choose between, death or a time period later)</p>
<p>I have seen clients do GRITs to transfer their home:<a href=“http://www.thewealthcounselor.com/uploads/1_GRITs__GRATs__and_GRUTs_Trusts.pdf”>http://www.thewealthcounselor.com/uploads/1_GRITs__GRATs__and_GRUTs_Trusts.pdf</a></p>
<p>Life insurance done as ‘survivor’ meaning the benefit pays on the death of the second spouse are very popular ways to fund death taxes especially in cases where the assets are businesses so illiquid. You don’t want to be forced to ruin the business or sell it to pay death taxes. The viability depends on the underlying health of the persons being insured, actually mainly on the person in the best health. Preferred best premiums are markedly better than standard rates, if the person is too old or in lousy health, the premiums can be difficult to afford!</p>
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If the real estate is in California, not only do you inherit at the stepped up value but you pay property tax at the low basis value, should you decide to keep the home. In some counties you can purchase a different home of equal or lessor value and transfer the low basis tax rate. </p>
<p>@gourmetmom, under current US tax code, you can receive $14K from an unlimited number of people with no tax consequence to them. What I posted is perfectly legal,it is not a scheme. There are some things that even high priced professional advisors don’t know or won’t tell you because you didn’t ask.</p>
<p>Firstly AM, thanks for this thread. DW & I are both FOBs and don’t have any too many relatives in this country. Any thoughts on picking an executor? Some of the advice we’ve heard - never appoint two people to do it since the conflicts will make it worse; don’t use financial institutions or lawyers and keep it with someone you have a personal relationship with; making one child the executor is likely to strain the relationship with the others; don’t go with an out-of-state person, etc. etc.</p>
<p>Independent question - what do you think are the essential documents needed:
Document with list of assets, including those that are primarily for sentimental value
List of accounts
Hard copies of important documents
Will for both of us
Possibly living trust to avoid probate of house and non-retirement assets (our estate will be well under the limit)
POA, with a suggestion that kids give us POA, at least till they get married
Living Will, AD
Arrangements for things like organ donation/giving body to science or med school
Anything else??</p>
<p>@Dad<em>of</em>3</p>
<p>This won’t be a exhaustive list but, because you asked, I’ll share my thoughts:</p>
<p>(1) Executor: the choice is important because this individual will have the hard task of representing your interests, carrying out your last wishes and administering your estate. I agree that unless you have reasons for it, co-executors are not a good idea. You should name one executor and at least one alternative if the first one cannot serve. In most states, the Independent Executor (once the will has been probated) has broad powers. Given the fact that you have three children, it may be most “neutral” to appoint the child that lives the nearest to you in your old age because that child will be best positioned to know your affairs, etc., appoint the child who is most knowledgeable in financial or legal matters or in the order of eldest to youngest. If you 't think that choosing any child might cause problems with the others, then you’ll have to appoint a 3rd party or a 3rd party + one child as co-executors. Those would be my thoughts. </p>
<p>I think the best way to handle the appointment of an executor among your children is to discuss the choice openly with them so that they all understand the decision. They can air out their concerns and differences while you are around to diffuse them. </p>
<p>(2) Because you are immigrants, it will be very important that you have all of your immigration papers in order, especially if your children are also foreign-born. I would start by putting together a master file of CERTIFIED copies of their original birth certificates, immigration papers, residency papers, naturalization papers, etc. They will each need these when they can no longer rely on you or your W to furnish them. </p>
<p>(3) If you want your children to maintain contact with family in your country of origin, obviously names and addresses of people to notify. </p>
<p>I’ll write more tomorrow when I have more time and if I have more to say about some of the other items, but you have a good working list. </p>
I hope others will comment on the proposed changes to taxation on inherited assets that will be announced in the State of the Union address Tuesday night. In particular, elimination of the provision for stepped up cost basis for inherited investments and real estate could be a game changer for estate planning when and if it passes. I understand the reasoning for the proposed change and agree it is a huge loophole, but how will it affect planning? What happens if cost basis information is not available, how will that be handled? I guess it’s premature to take any action now, but it would be interesting to know what other’s think of this. Press coverage so far describes the changes as only affecting “wealthy heirs and heiresses”, but anyone with real estate that has appreciated will be affected if they plan to leave the property to their heirs.
What are other proposed changes?
My take on this is it complicates the matter. They could achieve the same goal of making weathier individuals pay more taxes just by either lowering exemtion limit or raising the tax rate. This sproposed change would create unnecessary headache for honest people while sneaky ones will find a way to circumvent. How do you price a family business you inherited? You have to add cost of improvement you paid for iover many years in the cost basis.
I don’t mean to politiicize but If you are honestly seeking cooperation from an opposition party would you propose detailed changes in State of Union address?
I’ve just been reading short reports from news organizations so don’t know the full proposal or how likely it is to be implemented in the near future. Not sure which aspects will get the bipartisan support they need to pass. More information and analysis should come out after his speech. The claim is that changes will affect only the “top 1%”, but elimination of the “stepped up” basis for inheritance will affect many in the middle class too, unless they plan to die penniless and their parents die penniless. Here is a fact sheet:
http://images.politico.com/global/2015/01/17/factsheet117.pdf
Wow, if stepped up bases are truly going to be eliminated, that certainly would be a game changer. It was a basic principle back in law school and has been used in countless estaet plans. CPAs and estate attorneys will be very busy if these ever pass, even in a reduced state.
Will have to see what (if anything) gets through Congress.
If the couples exemption is still about $10MM, then the stepped up basis will be problematic, but not cause taxes for many, and yet will be a HUGE headache.
But, I think this must be lobbied by estate planning attorneys, think of all the work to readdress all the trusts and wills based on a stepped up basis, ug.
I think there will be significant pushback from many people, so for it to move forward will require tons of exceptions and exemptions, eroding the intent.
If the basis is NOT stepped up and the property being passed to heirs is a taxable event, there will be a lot more sales to divide assets, I predict.
I don’t believe Congress has any intention of passing anything like this at this time, as a practical matter. Time will tell.
This is the first I’ve heard of this (been busy selling mom’s house), but it sounds like one of those nice things to propose in the State of the Union, but it will never see the light of day out of any Congressional committee. Agree that when people dig into it, it will become apparent it will be a huge negative on the middle class. Likely a relatively bigger deal to middle class than upper class.
I think the intent is to collect capital gains tax regardless of whether the total estate surpasses the estate tax exclusion value. Imagine the extra work for executors. If an estate is to be divided equally among heirs the executor will need to calculate the anticipated tax due for the sale of each holding in order to equalize the proceeds. Currently they can do a simple non-pro rata distribution based on face value. True, it’s a nice problem to have, but makes a difficult job more complicated.
I read the politico paper, it appears they are saying $500K exemption per couple on your house and/or (not sure) $200k exemption on capital gains. I read the phrasing to say that the capital gains are not protected by the estate exemption, which kinda stinks, especially with their talk of only the top 1%
I can think of many baby boomer friends whose parents still live in that CA house, bought in the 50s & 60s & 70s for sub-100k and now approaching $1MM & perhaps kept and not sold sooner because of that very stepped up basis. Too late now for most of them to sell every 5 years and take the $500k exemption!
I suppose it does or does not stink that they made that money, but the old parents living in those homes did not make or experience the benefits of that home value & they may have (I know people who did) chosen to let it ride and use the stepped up basis instead of other plans over their retirement. It feels a bit like changing the rules in the 9th inning.
Are the exemptions allowed every 5 years? Wouldn’t that fuel sales of stocks/homes?
Is there a study about how much people benefit from step-up? My impression was that people trade stocks a lot. The professionals who used to manage our portfolio rarely kept anything more than three years. Any step-up would be appreciations for less than 3 years. That doesn’t seem all that much. For family businesses that were kept in family for generations, it would be a lot more.