Golden Years? Part Three in a Series

Wealth Management

By Victoria Rogers

Part three of a five-part series detailing a personal journey into planning for the later years of life precipitated by my father-in-law’s abrupt move to a personal care home.

Asset Planning - 5/31/12

How is your house titled? After my mother-in-law passed away, my father-in-law titled the house in his name and that of his three children with right of survivorship. It seemed an easy solution, but it still leaves a quarter of the home as a personal asset, not to mention potential gift tax consequences. Titling in the name of a revocable trust is a better option. The property will avoid probate and be distributed according to the terms of the trust after death. While he is still living, selling the residence held in the trust would not trigger capital gains tax since it was his primary residence. Another choice is an Enhanced Life Estate deed, also known as a “Lady Bird” deed. The owner can live in the residence and retain the right to sell it. Upon his death it transfers directly to his heirs. In Pennsylvania, investigate the life estate deed or Medicaid Asset Protection Trust. These are a simpler choice than establishing a trust. For any option, consult an attorney to ensure it adheres to the laws of your state. Keep in mind any asset transfer may be subject to a Medicaid look-back period of five years.

We are hoping to sell the house, but we all have to agree! When we sell, we will have to pay capital gains taxes. Since we are not eligible for a personal residence deduction, tax will be calculated on the sales price less the cost basis. Dad bought the house in 1953 for $14,900. This is the starting point; add in any commissions, certain closing costs and capital improvements. Keep good records of home improvements. The more basis you can verify, the less tax will be due. If Dad were to pass away before we sell, his portion would get a step up in basis to the date of death value. His 25% would then be divided among his children under rights of survivorship with the new basis. Deeding the property as he did in 2005 locked in a low basis for the rest of us.

Beyond your home, take a look at bank accounts, brokerage, annuity and retirement assets. For non-retirement accounts you can title them payable upon death, also known as Totten Trusts. Simply ask your bank to title the account “in trust for” your beneficiary. For joint accounts, ensure that the accounts are titled with rights of survivorship. Otherwise these assets will transfer by will, subject to probate. Retirement accounts must have beneficiaries. Be careful, especially if your marital or family situation has changed. By law a surviving spouse is the beneficiary of certain qualified accounts. He or she must disclaim if you would like a different beneficiary. Make sure you have secondary beneficiaries named as well or state law could decide where your accounts go. If you have established a living trust, retitle your assets in the name of the trust or make the trust the beneficiary of your accounts.

Do you have art, jewelry, or collectibles? Anything with an appraisable value can be titled or designated by will. Establishing a trust under will can protect the assets until disposition. Charitable donations are another powerful tool. If you’ve been collecting stamps all your life and your heirs have no interest, you can make a charitable donation and get the benefit of a tax deduction now, if structured properly. For instance, Fidelity Charitable will allow you to donate complex assets such as collectibles or even non-publically traded stock. Typically they will sell the asset and apply the proceeds to a donor advised fund for use according to your wishes. For an added benefit, couple that deduction in the year you make a Roth conversion or large retirement distribution to mitigate income tax due.

Mark your calendar to review your trust and beneficiary designations annually to ensure that they still reflect your wishes. Informally, you can write a letter to include with your will, or label those small sentimental belongings. We’re always pleasantly surprised when we find a note my mother-in law left behind, and we know her wishes will be honored. 

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax or legal advice.  Please consult your tax or legal professional to determine which direction is best suited for your specific needs.

Next:  Health Considerations

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2019 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.