Step right up…

… to understanding one of the most powerful tools we can use in estate planning, to save your loved ones lots of money. The great thing is, because this is an income tax savings, not an estate tax savings (which only helps multi-millionaires), this can work for almost everyone – not just the very wealthy. The key concept is something we call “basis step up.”  In this post, we’ll cover WHAT is “basis” and WHY it’s important. Next time, we’ll explain how and why your old trust could be unnecessarily costing your beneficiaries some, or all, of this ‘step-up’, and how to fix the problem.

What is “basis”? Well, if you buy something for $10, and sell it for $35, you have made a gain of $25, which you have to report on your income tax return, and which usually results in extra taxes, called capital gains taxes. The amount you put into the item you sold is called your “basis” or “tax basis.” This includes what you paid for it initially, and also what you paid to improve it (so, if you buy land for $10,000 and spend $50,000 to build a house on it, your basis in the property would be $60,000). Your gain – what you are taxed on – is arrived at by subtracting your basis from the amount you get for the property when you sell it.  So, if two people sell properties for the same price (say, $100), the one with the lower basis will have a higher gain, and therefore will usually pay more tax.

How does this work, though, with property you get by gift, or inheritance? Since you paid nothing for it, is your basis zero? Nope! If someone gives you a gift, then you get what we call a “carryover” basis – your basis is the same as theirs was. If I buy something for $10 and give it to you, then no matter what it was worth when I gave it to you, or how long you keep it, your basis will be $10. If you sell it for $100 – even if that was its value when I gave it to you – you will have a $90 gain. (Of course this gets more complicated if you pay just a little for something, so it’s really a “partial gift,” but that’s beyond the scope of this overview.)

BUT, it’s different (most of the time) when you inherit property – that is, you get it because someone died and left it to you. It doesn’t matter if you get it because they made a Will leaving it to you, because you were their natural heir, or because their  revocable living trust said that you get it when they die.*  Most of the time, if you get something when someone dies, your basis will be the market value on their date of death. So if they paid $10, but the property was worth $100 when they died, you will have a basis of $100! If you turn around the next day and sell it for $100, you will have zero gain (and thus, nothing to pay income tax on).

This basis step-up can be a great boon to your heirs or beneficiaries. Let’s say you paid $10,000 for a vacant building lot, and spent $40,000 to build a house on it (this was back in the ’60s, when money went a lot further). Your basis in the property is $50,000. But now, in 2014, thanks to inflation and the housing market boom, the property is worth $550,000, and rising. If you sell it, you will have a gain of $500,000. If it’s your home, you may be able to shelter some or all of that gain from tax; but if it’s not your primary home, or if you give it to someone else, such as your children, and THEY sell it, they will have a tax bill of over $100,000. If you leave the property to them when you die, though, they will probably have little or no taxable gain!

Now there are some exceptions to this. For example, you can’t just give someone something the day (or month) before they die, have them will it back to you, and get the higher basis. Also, the basis adjustment works both ways, so if the value goes down between purchase and death, you are stuck with the lower (date of death value) basis, which can mean more taxable gain.

Stay tuned for more about the basis ‘step-up’, and how to get the most out of it for your loved ones when you pass on.

*Some special kinds of trusts do not work this way, but here we are talking about the most common trusts, revocable trusts, which many people create to avoid probate and keep their affairs private when they die or become incapacitated.

Published in: on October 25, 2014 at 11:04 pm  Leave a Comment  

Where there’s a will…

… there’s a way (or so they say). And, in fact, it’s true – almost everyone should have a will. Even if you have a trust. And even if you are young, of modest means, and perfectly happy with the state’s “default” plan for distribution of your property. Here’s why:

What if you have a fully-funded trust, but are killed by a drunk driver, or by medical malpractice? Your estate (NOT your trust!) could become the plaintiff in a multi-million dollar lawsuit, or the recipient of a large settlement or insurance payout. Even if you have a trust, those proceeds would be coming to YOU – and hence, to your estate – not your trust. This is just one example of why the ‘pour-over’ will is an important part of a trust plan.

Or what if you learn that you were named as a beneficiary of someone else’s estate, such as a distant relative or long-lost friend? And then, by a twist of fate, (more…)

Published in: on July 20, 2014 at 11:06 pm  Leave a Comment  

‘Worm Food or Crispy Critter’ Revisited

One of my first posts on here, a few years ago, discussed the issue of legal responsibility and authority for disposition of one’s remains. My conclusion was that the rules and governing law here in Hawaii were less than crystal clear, but that some general principles from other states’ laws, and general common law, might be applicable.

Well, Hawaii has recently enacted new legislation in this area (apparently becoming the 49th state to do so), so now we (and the courts and funeral homes) have clear legal guidance for dealing with potential disputes in this important and emotionally-charged realm. The statute lays out who has the legal priority to make the necessary decisions regarding disposition of a deceased individual’s remains, and – more importantly – also provides a legislatively-sanctioned form that YOU can use to both name an individual of your choice to make such decisions (in lieu of the default priority list, which might give the power to someone you would not elect) and to indicate any specific wishes you may have regarding disposition.

We have the form available and will be happy to help you to complete it. If you are already a client of ours, we will help you make this important addition to your existing estate plan for a nominal charge. (If you are enrolled in our Maintenance Program, the service is FREE. Yet another reason why the Maintenance Program is the best deal in town.)  If you are not already a client, give us a call and we’ll be happy to help you with all of your estate planning needs.

Published in: on October 25, 2013 at 1:12 am  Leave a Comment  

Hot Off the Presses: 2 New Laws

Hope you are all enjoying this lovely Memorial Day weekend. I am, thanks in part to having just learned about two new laws that have been sent to the Governor for signing. Each of these laws, if passed, will make our planning here in Hawaii much easier.

The first of the two actually solves a common dilemma for married couples (and reciprocal beneficiaries) – whether to continue to hold property as “Tenants by the Entirety,” keeping the creditor protection provided by that type of tenancy, or to put the property into a revocable trust, losing the T-by-E characteristics but obtaining the advantages of the trust. If this law passes, then it will no longer be necessary to choose; a couple will be able to put their “T by E” property into their trust (or even separate trusts), and still keep the creditor protection afforded by the Tenancy by the Entirety form of ownership.  (There are a few ‘hoops’ that have to be ‘jumped through’, however, so it is critical that this be accomplished with the assistance of a knowledgeable attorney – among other things, the trust(s) must be named properly, and there must be special language in the property deed.)

Couples who have already placed their property into trust(s) will probably have to re-deed it back into Tenancy by the Entirety, possibly rename their trust(s), and then put the property back into the trust(s), to get the benefit of the new law. Still, it will be great to have this extra option in our planning toolbox here in Hawaii.

The other new statute is yet another “second try” law, a phenomenon that seems to be getting more common. First there was the Asset Protection Trust law, which was horrible when first passed in 2010, and then not-so-bad after the Legislature fixed it up in 2011. Now we have “Hawaii Estate Tax, Version 2.0,” which seems to fix some of the more complicated and difficult-to-implement (not to mention plan for) aspects of the Hawaii Estate Tax (referred to in a previous post as the ‘Zombie Tax’). Although I have only perused it VERY briefly, and much more study is necessary, its major thrust seems to be bringing the Hawaii exemption in line with the Federal Estate Tax exemption, so that we will once again not be a “decoupled” state. This will make planning easier, as the trust provisions that help married couples eliminate tax on the death of the first spouse will no longer have to take into account a Hawaii exemption that could be lower or higher than the Federal exemption.

Now, if we could just get some certainty and stability in the Federal Estate Tax laws, we might be able to relax a little about all this tax nonsense and focus on what’s really important – helping people pass on their legacies, memories, and values to the younger generations.

 

Published in: on May 27, 2012 at 8:57 pm  Leave a Comment  

What’s a trust, and why you might want one

A will determines ‘who gets what’ after you die, who is ‘in charge’ of handing it out (and paying your debts, taxes, etc., and all the other things that have to be done to tie up your affairs), and sometimes, who will be guardian of your children. A trust can do much more than that.  A ‘living trust’, which is a trust set up while you are still alive, can give someone the right and authority to manage your affairs while you are still alive (if you can’t, or don’t want to), and can make the transition of wealth and control easier and less costly when you die.  A living trust or a ‘testamentary trust’ – one set up by your will, that doesn’t come into existence until your will is probated after your death – can control not only who gets what, but WHEN they get it, and under what circumstances. Trusts can be used to transfer wealth while you are still alive, or upon your death.  They can provide for ongoing management of funds by skilled, careful individuals, for the benefit of others who might not possess the ability or control to act prudently. Some kinds of trusts can be used to save taxes, or to protect someone’s right to receive government benefits such as Medicaid or SSI. Trusts can sometimes be used to protect assets from creditors, including ‘involuntary creditors’ such as future ex-spouses, and lawsuit plaintiffs.  Trusts may avoid court involvement in the transfer of wealth, making it easier and less expensive.

So what IS a trust?

A trust is an arrangement whereby one person or entity, the “trustee,” is given title to and control over some assets (the “trust property”), which are to be invested, used, and distributed for the benefit of one or more other people (the “beneficiaries”). The trust document lays out the “rules” for how the trustee is to hold, invest, manage, and distribute the trust property. The trustee has a “fiduciary duty” – a very strict, (more…)

Published in: on June 26, 2010 at 10:55 pm  Leave a Comment  
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