Patinelli & Chang, LLP

Property Transfers and Gift Taxes: Estate Planning Basics

“Now that you rented your old house to your daughter, that home may be considered a rental home on your federal income tax. You get to treat that as an investment property and can take some of the tax advantages available to investors, including taking depreciation on the home, deducting expenses for the upkeep, as well as deducting real estate taxes and other expenses.”

As we age, our needs change. That includes our needs for the property that we own. For one person, the family home was rented to the daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land. The answers are presented in the article “Dealing with property transfers and gift taxes” from Chicago Tribune.

For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.

When you give someone a home, they receive it at the price that was paid for it plus these costs.

Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.

It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.

This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate attorney, who can evaluate all the factors, since every situation is different. One suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.

The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.

As for the question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.

A meeting with an estate planning attorney is the best way to ensure that the transfer of a family home to a family member is handled correctly and that there are no surprises.

Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”

Your Biggest Estate Plan Challenge: Your Family!

“When the topic of estate planning comes up, talk about taxes is soon to follow. That train is rarely late. Taxes are important, but they aren’t what keeps planners up at night in 2018.”

Estate planning attorneys, trust officers, accountants, charitable giving professionals, insurance advisors, elder law attorneys and nonprofit advisors, who recently attended a major conference on estate planning, were surveyed by TD Wealth. Their biggest worry for the success of client’s estate plans: family conflict.

An article from WealthManagement.com, “Family Conflict Tops the List of Estate Planning Challenges in 2018,” says 44% of all planning professions consider family conflict more of a threat to estate planning than tax reform (25%) and market volatility (12%). That is not a small number.  It should be considered, while creating or revising an estate plan.

One reason for these results is that the response to the Tax Cuts and Jobs Act has received mixed reactions from estate planning attorneys and financial professionals. Some believe it may help their clients, while about a third of those queried in the TD Wealth survey aren’t sure. Only 16% feel the tax reform will have a negative impact on their clients.

Almost 75% of those taking part in the survey felt that clients who do benefit, will do so because of wealth transfer tax changes. About a third expect that clients will see the biggest benefits from new estate tax laws, followed closely by generation-skipping tax and gift tax updates.

What is the biggest challenge that people face when addressing their estate plan, according to this survey? It is naming guardians for minor children and beneficiary designations.

Talking with family members about your estate plan and even bringing them to your estate planning attorney’s office for a family meeting, can be one way to head off potential conflicts. Your estate planning attorney can work with you to create a plan for discussing challenging topics. If all else fails, the attorney may be able to recommend a social worker who is familiar with family conflicts that arise during the estate planning process.

Reference: WealthManagement.com (March 28, 2018) “Family Conflict Tops the List of Estate Planning Challenges in 2018”

Gifts for Educational Purposes

Giving money to children and grandchildren for educational purposes is a common goal in estate planning. There are several different ways that it can be done efficiently.

Most people would prefer that their children and grandchildren do not have to go into debt to get an education. If they can find some way to pay for the education, besides having college students take out student loans, it is what most parents and grandparents would prefer.

It is common for people to take this into consideration when they visit an estate planning attorney, because they would like their estate plans to account for future educational expenses. There are a few good ways that the educational expenses of children and grandchildren can be covered, as The Legal Intelligencer recently explained in "How to Make Tax-Efficient Gifts to Children, Grandchildren for Their Education," including:

·         529 plans are investment vehicles that allow people to put money in tax free. The money can then be used for the educational expenses of a beneficiary later. Withdrawals for education are also tax free.

·         Irrevocable trusts are another option. They do not have the same tax benefits.  However, they can be grantor retained trusts allowing the settlor to have control over the assets, so they can be invested appropriately.

·         Another option is to pay the child’s or grandchild's tuition directly. Educational gifts made in this way are not subject to gift taxes.

·         IRAs can also be used for this purpose, when gifts to children or grandchildren are used to fund their own IRAs.  However, you should consult with an accountant first, because there may be unintended tax consequences, if not done properly.

Reference: The Legal Intelligencer (Feb. 12, 2018) "How to Make Tax-Efficient Gifts to Children, Grandchildren for Their Education."

Revisit Your Gifting Plans

With the new tax laws in place, you should revisit any gifting plans that you previously made.

With the passage of a new tax law that doubles the estate tax exemption, there has been a lot of talk about what that means for current estate plans and how people might plan differently to take full advantage of the new exemption limits.  However, one thing that often gets lost in the discussion, is what it means for currently existing gifting plans.

Gifting is usually done to shrink an estate as much as possible to lower the eventual estate tax burden. However, that may not be necessary now for some people as My San Antonio points out in "How gifting of ranch land to family can increase taxes owed."

Some people will have no need to continue gifting programs designed to shrink an estate below the former exemption limit, so it will not make sense to continue those programs. However, that comes with a caveat.

The estate tax exemption limits are scheduled to revert to their previous levels in 2026. Many experts do not think that Congress will extend the exemption beyond then. That could mean that if someone lives past 2025, then a lot of gifting years have been wasted and more estate tax could ultimately be due.

Whether continuing a gifting program is a good idea, depends on an individual's personal circumstances.

Talk to an estate planning attorney about what you should do.

Reference: My San Antonio (Jan. 29, 2018) "How gifting of ranch land to family can increase taxes owed."

Tax Inflation Changes for 2018

The IRS recently announced what the annual inflation changes will be for some important taxes for estates and those who are planning their estates.

Every year the Internal Revenue Service adjusts tax exemptions and deduction limits to keep them in alignment with inflation. The changes that are made can have a big impact on estate plans, even if the actual adjustments are relatively small.

 The IRS recently announced some of those important changes. They could make a difference for people planning their estates, according to the Wills, Trusts & Estates Prof Blog in "Estate Planning Inflation Adjustments for Tax Year 2018 & 2017-2018 Priority Guidance Plan."

Changes include: (SUBJECT TO CHANGE SINCE CONGRESS MAY PASS NEW LAW)

·         Lifetime gift tax exemption increased to $5.6 million.

·         Annual gift tax limit increased to $15,000.

·         Annual gift tax limit to a foreign spouse increased to $152,000.

·         Estate tax exemption increased to $5.6 million.

·         Failure to file a return within 60 days of due date, to result in a penalty of $215 or 100% of amount due, whichever is lower.

If you have questions about how these changes could impact your estate plan, visit an estate planning attorney.

Reference: Wills, Trusts & Estates Prof Blog (Nov. 8, 2017) "Estate Planning Inflation Adjustments for Tax Year 2018 & 2017-2018 Priority Guidance Plan."

GOP Tax Plan Includes Estate Tax Repeal

For the last few months, there has been speculation about whether President Trump and the GOP would attempt to repeal the estate tax or drop the idea to focus on other tax ideas. For now, they have indicated that an estate tax repeal is still in the works.

The Trump administration and Congressional Republicans are very slowly inching toward tax reform. It has not always been clear what type of reforms they might be considering.

Many different possibilities have been discussed.

However, they have now released a joint framework that gives an idea of their main priorities.

Advocates for a repeal of the estate tax will be pleased to know that a complete repeal of the tax is included in the framework, as Forbes reports in "Trump GOP Tax Reform Framework Calls For Estate Tax Repeal."

Despite including a repeal of the estate tax the framework is curiously silent on the gift tax, which normally goes hand in hand with the estate tax.

If the ideas in the framework were eventually to become law, that would mean pre-death transfers could still be taxed, while post-death transfers to the exact same people would not be.

Of course, releasing a framework for reform is not the same as passing legislation.

There is a long way to go before the estate tax is repealed and the issue is likely to be contentious in Congress.

Reference: Forbes (Sep. 27, 2017) "Trump GOP Tax Reform Framework Calls For Estate Tax Repeal."

Related articles

Editorial: Pull plug on death tax

2018 Estate Tax Exemption Projections

Experts predict that the estate tax exemption for 2018 will increase slightly to $5.49 million for a single person and $10.98 million for couples.

The IRS has not yet announced what the 2018 estate tax exemption will be. However, expert analysts think there will be some slightly good news for wealthy people.

They predict that the exemption should increase to $5.6 million for a single person and more than $11 million for married couples.

At the same time, they predict that the annual gift tax exemption should also increase to about $15,000, as Forbes reported in "Estate Tax Exemption To Top $11 Million Per Couple in 2018."

This should give wealthy people and their estate planning attorneys a little bit more flexibility, as they attempt to shrink estates to below the threshold.

While most people who might be affected by this exemption increase would prefer to see the estate tax repealed entirely, that is increasingly looking like it will not happen this year.

Congress has turned its attention to tax reform, but getting anything passed could be a long process and will likely continue into next year.

Repealing the estate tax is also controversial. If Democratic votes are needed to pass tax reform legislation, that might take the estate tax off the table.

If you have questions about your estate and how it might have an impact on the estate tax, then you should see an experienced estate planning attorney in your area.

Reference: Forbes (Sep. 15, 2017) "Estate Tax Exemption To Top $11 Million Per Couple in 2018."

Will Trump Kill the Estate Tax?

One of the biggest questions concerning estate planning right now, is whether Donald Trump will carry out his campaign promise to eliminate the estate tax and whether or not he should.

The estate tax is a one of those hot button issues over which political parties are sharply divided. While campaigning for the presidency, Donald Trump repeatedly said he would eliminate the tax. His is a position that most Republicans in Congress share. Now that Donald Trump and congressional Republicans have the power to do away with the estate tax, the question becomes whether they will actually do so.

Financial Advisor addressed that question in "Death to the Death Tax?"

“I think there’s a chance he [Trump] will repeal the whole thing,” said tax attorney Martin Shenkman, whose namesake firm in Jersey City, N.J., and New York City focuses on estate and tax planning for high-net-worth individuals, closely held businesses and real estate professionals.

Shenkman also said there’s speculation about abolishing the gift and generation-skipping taxes. He pointed out that, while these taxes do not raise a lot of revenue, they were at one time intended to minimize the wealth-concentration in our country. Whether or not they still serve this social purpose, or should, is up for debate.

With all of this uncertainty, no one can predict the final outcome, but, as Shenkman said, “There’s no reason to stop planning because of this uncertainty, if the end result of the planning is to get assets in a better place than they are now regardless of the tax.”

Reference: Financial Advisor (January 3, 2017) "Death to the Death Tax?"

Depression Era Trusts May Expire Soon in Torrance CA

Many family dynasty trusts created during the Great Depression to avoid rising taxation, will automatically terminate soon. Trustees and beneficiaries need to be prepared.

One of the lasting legacies of the Great Depression will soon come to an end. In response to that crisis, the government greatly increased the gift and estate tax rates. Wealthy families responded, in turn, by creating dynastic trusts to hold their wealth and preserve it for future generations.

Most of the trusts created at that time have mandatory termination dates at which time the trust assets must be distributed to the residual beneficiaries.

Successfully carrying out that process will require some planning as the Wills, Trusts & Estates Prof Blog explained in "Preparing for Trust Termination."

The first challenge for many trusts and trustees will be determining the residual beneficiaries. In many cases, they could be distant relations of the original trust settlors and not the same people who currently receive regular distributions from the trusts.

Once the beneficiaries are determined, they will need to plan for how receiving the trust assets, will  impact their lives and financial futures. Depending on the amount of money received, the beneficiaries' tax and estate plans could change dramatically.

Those who do not plan appropriately, could face negative consequences that could have been avoided.

If you are a residual beneficiary of a depression era trust, you should seek independent legal advice. It might not be a good idea to rely on the advice offered by the trustees and their legal advisors.

You need an attorney who will be acting only in your interests.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 5, 2016) "Preparing for Trust Termination."

Giving Charity to Specific People

If you would like to make a charitable gift to a specific individual, you can. However, you should be aware that there are rules that need to be followed.

There are all kinds of people in the world who are in need of charitable assistance. Fortunately, there are many others with the means and desire to provide that assistance.

The normal method of donating is to give to an established charitable organization and to let them sort through the people requesting assistance and donate to those most worthy. What if you have found a particular individual you would like to help directly? Certainly you can give to him or her. However, if you hope to deduct the donation from your taxes, then you do need to be aware of the rules.

The Wills, Trusts & Estates Prof Blog discussed this issue in "Charitable Giving to Individuals."

If you are hoping to give to someone directly, then they need to have a private foundation pre-approved for the purpose. Furthermore, you need to be able to prove that you chose to give to them in a fair and non-discriminatory way. You cannot, for example, just give to someone who a co-worker knows needs money for educational expenses and deduct it from your taxes.

To best cover yourself you will probably need to have developed a grant application for the person to fill out.

You might consider just using your gift tax exemption to give to specific people as that would be a lot easier. Make sure you talk to an estate planning attorney first because large gifts should only be made with your estate plan in mind.

Reference: Wills, Trusts & Estates Prof Blog (Oct. 5, 2016) "Charitable Giving to Individuals."