Trusts ~ An estate tool for everyone

Anibal-Group-RealtyNetWorth-Dog-In-LakeOnce you’ve physically or mentally passed to the next realm, you will leave some situation for family. Complicated interactions, probate and extra taxes may be the gift you leave. Or you may set up a trust.

A trust can greatly simplify things. There are many types used for various situations. The most common is a revocable living trust. It lets you:

  1. specify how your estate will be distributed
  2. can avoid probate – a lengthy, costly & emotional process
  3. minimize arguments

Joint property ownership, or payable-on-death transfers or accounts can also avoid probate. Be careful about the taxation consequences of these.

The cost will vary depending on your situation, but $1,500 to $3,000 may cover the basics of:

  • your trust
  • a will
  • medical directive and
  • a power of attorney

List out for assigning all of your assets to the trust that you wish to avoid probate. Include wording for any additional assets so they may ‘pour over’ into the trust.

Retirement accounts and insurance policies generally aren’t subject to probate.

While alive, you have control to change, or even revoke it. Revocable trusts don’t require a tax return. This type of trust is part of your estate & won’t offer much tax benefit or asset protection. An  irrevocable trust can, but once set up is difficult to alter.

After passing:

Further benefits are clarity and control. You may detail how your assets are distributed to beneficiaries and avoid much family conflict. For younger ones, a trust can outline ages and conditions they receive what part of their inheritance.

Special needs trust:
A special needs trust is a form of revocable trust designed for dependents with disabilities. Social Security allows disbursements without disqualifying them from Social Security, Medicare, or other benefits.
Private or public wishes?   
If you use probate things can complicated since probate files are public record, trusts are not. As always, seek legal, tax, and financial feedback from advisors in all areas.


* The above is for informational purposes only. Anibal Group LLC is not offering professional advice & this article is not to be considered advice specific to your situation. Your decisions should involve professionals of your choice re: insurance, legal, banking/ lending, structural/ property condition, and other transaction significant matters. We can offer referrals.

Passing Your Home to Your Children.

When/ How/ If: I Should Deed My House to the Kids

There can be some benefits, but also drawbacks to both the gift giver and recipient(s).

(Speak to your accountant/ lawyer/ lender/ and insurance agent for specific advise – the following is excerpts from counsel received and not to take the place of paid advisers in their respective field of licensing.)Anibal-Group-RealtyNetWorth-Senior_Services_woman-elder-2

Some will:

  1. Add the child’s name onto the existing deed.
  2. Make an outright gifting over.
  3. Deed over but reserve a life estate.
  4. Will the property, i.e: a “transfer on death”.
  5. Others consider a revocable trust, irrevocable trust, or a family LLC.

#1, Possibly Tax Disaster.

  • Set up an office visit. There are good reasons, but often more bad reasons to use this strategy.

#2, Outright Gift.

  • Irrevocable, the parent loses control and legal right to stay in home. Perhaps the parents will rent back.
  • Ends the parent’s right to claim any preferences on property tax bills, e.g.: the homestead exemption, being blind or over 65, hardship/ low income exemptions.
  • This can dramatically increase property taxes.
  • If real estate transferred to a child is worth more than what was paid to purchase and improve it, then the child pays capital gain tax on the sale of the property. (The $250k/ $500k MFJ primary residence exemption is not applicable unless you own and live in the property).
  • Children’s (ex)spouse and creditors may have the ability to seize the property.
  • vs. Will at death.
    • If a parent’s Last Will and Testament leaves real estate to a child, parent can change their mind w/ a new will.
  • Additional Parent Considerations.
    • To remove the asset for Medicaid qualification, remember that a transfer of your real estate can make the parent ineligible for benefits for nursing home expenses, depending on when you enter the home. The length of time ineligible depends on the value of the real estate, whether it was transferred outright or retained as a life estate. Generally, its a five years look back.

A transfer of real estate is a “gift” and will no doubt require filing Tax Form 709 with the IRS.

#3, Gift with Retained Life Estate.

  • During life, the parent has the right to live in the property, and at death the life estate ends. Property transfer effectively at that time.
  • Some want to avoid probate after death, and possibly to avoid any court administration of their estate.
  • If the recipient child dies first, the child’s share in the real estate could pass to the deceased child’s spouse, rather than to the grandchildren.
    • vs a parent’s Last Will and Testament may provide that an inheritance would go to grandchildren if a child died before the parent.
  • The parent still loses a significant degree of control. If the parent sells the property, the proceeds belong to the parent and the child (remaindermen), split according to the percentage of ownership determined by IRS life-expectancy tables.
    • Capital gain tax would be owed by the child on his or her gains.
  • If the parent retains a life estate and the property is not sold before the parent dies, then under current law there would be no capital gain at the time of death because its cost basis is “stepped up” to the property’s market value on the date of death. This is a good thing for the recipient !
  • For Medicaid, the parent is deemed to own the entire interest in the real estate for five years after a deed execution retaining a life estate. They will also be the owner of the life estate interest thereafter, the value of which is calculated at the time of application for Medicaid.
  • RE: inheritance tax, the date-of-death value is taxable to the child – not lovely. But, the child gets a step-up in cost basis (easier if inherited at death in my opinion).

#4, Will the property.

  • Call the lawyer. Ok, now, plan for the child to do back flips on how much taxes you just saved him/her/them.

#5, The ‘entity’ approach.

  • The nuances will require coordinated input from your lawyer, CPA/ accountant, insurance agent, with some feedback from a real estate broker and your banker.

Bottom line.anibal-affiliates-realtynetworth_deeding-property-to-children-b

  • The when/ how to transfer should involve your accountant, lawyer, insurance agent, banker/lender at a minimum.

As I’ve told clients for decades: “You’re not dealing with a candy bar.”



Leaving your house to the children

particularly the part:
“….Joint Tenancy:……Another problem with owning property in joint tenancy is that when you add a co-owner to
the property as a joint tenant, you lose many aspects of property control. Many parents think that by
adding their son’s or daughter’s name to the property that it is a way to pass the property on without
a probate and this is generally true, but …...bla bla……. You also
expose the property to your co-owner’s debts and obligations, so by adding your son’s or daughter’s
name to the property, you could potentially lose your home to your child’s creditors if he or she is
successfully sued. There could also be gift and/or income tax problems if your co-owner is not your
…….bla bla bla…..
Finally, property held in joint tenancy only receives a step up in the basis equal to one-half of
the property value at the death of the first joint tenant.

Paul’s notes:
Easiest tax wise, the spouse owns with spouse….property willed to child(ren). Child(ren) get full stepped up basis to reduce tax burden on them. Parents get ease of mind not having to worry about child being sued and attachment to parents property.

I’ve seen children added to deeds prior to passing of parent(s). Sometimes this is great, but I saw a real estate agent give advise she wasn’t at all qualified to give & it created an immense hardship ($15ooo tax bill) that could have been avoided with a 5 minute call to myself.
This should involve legal AND taxation planning – if not insurable risk as well – consultation.