About: Liza Weiman Hanks

Recent Posts by Liza Weiman Hanks

Taxes and Beneficiaries: Estate, Income and Capital Gains

Dear Liza:

My aunt died recently, leaving her estate to me and my four siblings, in equal shares. She owned stocks and bonds, and some farmland in Iowa. Will I have to pay taxes on my share of the distributions?

That’s such a good question! You are most definitely not alone — almost everyone who receives an inheritance worries about the tax implications of the gift.

There are actually three taxes to consider here:

  1. The estate tax. If your aunt died in 2017, and owned less than $5.49 million dollars (like most people), her estate would owe no estate tax. That tax falls on the estate, not on the beneficiaries, so, even it were due, the trustee would pay that first, then distribute the assets to you and your siblings. The trust might pay it, then distribute what’s left, or, the trust might pay it, then deduct the tax payment from each distribution, but in your aunt’s case, let’s assume zero tax.
  2. Income tax. Beneficiaries don’t have to pay tax on distributions from the trust’s principal, but they will have to pay income tax on distributions from trust income to the extent that there are distributions to the beneficiaries or in the final year of a trust.  Income tax rates are much more compressed for trusts than for individuals, which means that a trust’s income is taxed at a much higher rate than that same income would be taxed to an individual.  That’s why it is usually better to distribute all the trust’s income out to the beneficiaries so that each beneficiary can pay tax on that income at their lower individual rate. How can you know which distributions are from principal and which are from income? Only the taxable portion of the distribution will be reported on the Form K-1 that you will receive from the trustee.
  3. Capital gains taxes. If your aunt’s assets have gone up in value since she died, and you sell what you’ve inherited from her (like stocks for example), you would have to pay capital gains taxes on the gain since the time of her death.

Who Gets the Life Insurance and How?

Dear Liza: My mother passed away recently and had everything, including her checking, savings, etc., in a living trust.  But one of her other insurance policies had my deceased father listed as beneficiary.  The insurance company is telling me the proceeds from that insurance policy needs to go thru probate.  The policy is worth $10,000.  She also has a will naming her children as inheriting her estate. Does my mother’s trust trump her will? 
Here’s my quick answer: no–your mother’s trust does NOT override her will, but they usually work together.  (I can’t bring myself to use the word ‘trump’ anymore in this context.)  But neither one controls who gets that insurance money or how it is transferred. Here’s why:
  1.  Your mother created a living trust to hold her biggest assets to avoid probate. That’s good.
  2. Your mother created a will also. That’s also good because not everything a person owns is usually placed in a living trust. A will is always done in a comprehensive estate plan.
  3. Usually, the kind of will your mother created would be a ‘pour-over’ will, which says that anything your mother owned in her own name at her death should be transferred/pour-over into her living trust after her death. This doesn’t avoid probate, but it means that, in the end (after a probate, if that’s necessary), the trust will determine who inherits.
  4. Life insurance, though, is transferred at death by beneficiary forms.  The forms dictate who inherits that asset, not the will OR the trust.
  5. Your mother named your father as a beneficiary, but he died first. So, the company is telling you that your mother’s estate is the default beneficiary. That’s typical.
  6. Assets owned by your mother’s estate will go through probate, but only if they exceed your state’s small estate limit. In California, where I practice, that’s $150,000. It is less in other states. You need to find out what it is in your state. If you lived in California, and that was the only asset you needed to transfer outside of the trust, you wouldn’t need to go through probate, you’d be able to use a Small Estate’s Affidavit. Here’s a Nolo article that will help you learn how to use that process in your state.

Hope that helps.

Reducing Capital Gains: Step-up in Basis, The Basics

Dear Liza: My parents a house in 1995. They put the house in a trust in 1998 with me and my 2 brothers as beneficiaries. My dad passed away in 2007 and my mom in 2015. The house is now for sale . I’m not sure what the tax basis should be. That is a really good question, because, as I’m pretty sure you already know, the difference between the basis of the house and the sale price of the house will determine whether or not you and your 2 brothers are going to owe capital gains taxes on the sale of the house.

Just to review: capital gains taxes are due on the difference between an asset’s basis and its sale price. So, for example, if you buy a share of stock for $10/share and you sell that stock for $110/share, you would owe capital gains on that $100 of gain. Where I practice, in California, we estimate capital gains to be about 33% (federal top rate of 23.8%, plus 13.3% California top income tax rate), so you’d owe about $33/share, worse case scenario.

Assets that you inherit at death get what’s called a step-up in basis. If your mother, for example, had bought that same stock at $10/share, but hadn’t sold it during her lifetime, you and your brothers will inherit that stock at what it was worth the day she died. If that was $110/share, and you then sold those shares for $110/share, you’d owe no capital gains taxes at all.

Houses, like stocks, also receive a step-up in basis at death. But I can’t actually tell you what the basis in your mother’s house would be because I don’t know enough of the facts. The answer depends on what kind of living trust they had, and that also can depend on where they lived.

If your mother and father had a living trust that held the entire house in one revocable trust for your mother’s benefit, you and your siblings will inherit that house at its value on your mother’s date of death.  Since you are selling it two years after her death you need an appraisal to document its value on your mother’s date of death.  If you didn’t get one when she died, you can still get one that looks at the value in 2015, it will just cost more to get. That 2015 value will be your basis.

For example, if the house was appraised at $350,000 in 2015, and you are selling it for $450,000, you will have to pay capital gains on that $100,000 of gain.

If your mother and father, however, had what’s called an “A/B” trust, in which your father’s assets were placed in an irrevocable trust for your mother’s benefit (usually called a “Bypass Trust” or a “Credit Trust”), then the portion of the house held in that trust will not receive a second step up in basis at your mother’s death, and you’ll have to pay capital gains on the gain from 2007 until now.

For example, if, when your father died, the house was appraised at $200,000, and, as is common, half of the house was held in the Bypass Trust, and you are selling it now for $450,000, you are going to have to pay more in capital gains than you would if all of the house was in a revocable trust. Here’s how it works:

Half of the house was held in the Bypass Trust and has a basis of $100,000 (because the house was worth $ 200,000 in 2007, when your father died). Upon sale, that half of the house had a basis of $100,000 ($200,000/2) and realized $125,000 of gain ($225,000 – $100,000). The other half of the house, which was in your Mom’s revocable trust, gets a full step up, so has a basis of $175,000 ($350,000/2). That half of the house realized gain of $50,000 ($225,000-$175,000). So, you and your siblings will owe capital gains on $175,000 ($125,000 from your Dad’s trust plus $50,000 from your Mom’s trust).

As you can see, the kind of trust your parents had will greatly affect the capital gains taxes you and your brothers will owe upon sale. So, first step, figure out what kind of trust they had. Next step, consult with an accountant.

 

We refinanced. Did our house get taken out of the trust?

Dear Liza:  We are a married couple in our 40s with 2 kids with a living trust. Our primary residence is a part of the trust. We refinanced our primary residence a couple of months ago. We are not sure whether our house was pulled out of the trust during the refinance. Is there a way to find out whether the house is still part of the trust or not? If the house is out of the trust how do we get the house back into the trust? Often, when people refinance a house that is held in their living trust, their lender requires them to take the house out of the trust, get the new loan, then transfer the house back into the trust. I’ve been told by loan officers that this is because they want to check your individual credit ratings.
This is not always required, it depends on the lender. Sometimes you can get a new loan without going through the out of the trust/back into the trust shuffle.  But if it is required, the loan officer will often create and record the deed transferring the house out of the trust so that you can qualify for the new loan (and they can get paid).  If they transfer it out, they should transfer it back in.  But often, that last step, transferring the house back into the trust, doesn’t happen. This is by far the most common reason that I find that clients end up with houses not in the trust.
To find out if your house is in your trust, you will need to get a copy of the last recorded deed. You can get that at your county’s recorder office. Many counties will let you order this online. Here is a handy website that lists all of the County recorder offices in California. If you go to Legal Consumer.com, you can find your local country registrar in any state, just by typing in your zipcode.
If our house is not held by your trust, you’ll need to record a deed transferring it back in. A lawyer can do this, but so can a title officer. You might consider going back to the title company where you signed the loan papers and ask them to record a deed transferring your property back in.

Why Does Met Life Need to Transfer an Annuity to the Estate?

Dear Liza:  My father recently died.  My dad had a trust set up naming me as the trustee and my brother, sister, and I are to split my dad’s assets evenly.  I have set up a trust account at his bank (B of A) and have funneled funds into that trust account from his other bank accounts.  I mailed off claim forms to a few companies in regards to his stock and annuity assets.  Met Life is saying that we need an “ESTATE” and it needs to list me as the executor of the estate.  She said that an estate and a trust are two different things and they needed an estate not trust.  What is she talking about? It sounds like you are doing a good job as Trustee. It also sounds like the annuity at Met Life may not have a named beneficiary, which would mean that is passes to your father’s estate (and not to the trust).

Here’s the overview: your father had certain assets in his trust. But he, like most people, also owned assets NOT held in the trust, most typically these are retirement accounts (like IRA’s and annuities) or life insurance policies which have named beneficiaries.

When a person dies, these assets go the named beneficiaries. But if a person didn’t name a beneficiary, or named a spouse who then died first and forgot to update the form, these assets then usually pass to a person’s estate (though that’s up to each company’s rules).

In California, where I practice, if that annuity is worth less than $150,000, there’s a simple way to get MetLife to transfer it to you, as Trustee of his trust using a Declaration allowed by the Probate Code. If that annuity is worth more than $150,000, though, you will either have to open a probate proceeding and be named as the executor and then work with MetLife to transfer the asset, or use a court Petition to transfer the asset to the trust via his Will (if it was what’s called a Pour-Over Will, which would be typical).

Each state has a similar threshold, called a Small Estates limit. To find out what your state’s limit is, visit Legal Consumer.com and go to the Inheritance Law Section, which I wrote. (Full disclosure). Enter your zip code and you can find out your state’s small estate limit.

The first step is to ask MetLife who the beneficiary of the policy is. Then, if your father didn’t name anyone, you should probably seek professional help to chart the next steps.

Recent Comments by Liza Weiman Hanks

    No comments by Liza Weiman Hanks yet.