Dear Liza: My friend has a stock portfolio she wants to give me before she dies. She had cancer and only has a few months to live. She wants to give it to me now to avoid the whole estate thing. The total is about $220,000. Do I have to pay gift tax if she transfers the portfolio to me in kind? I am sorry to hear that your friend is so ill. She can give you that portfolio, but it might not be the most tax-effective way to do it. If she gives you the portfolio before she dies, she (or her estate) must report the gift on a gift tax return by April 15th of the following year. She won’t owe any gift tax on the transfer, because in 2012, each of us can give up to $5.12 million dollars free of gift tax, but any gift over the annual gift tax exclusion amount of $13,000 must be reported on that gift tax return. If you later sell any of that portfolio, though, you will owe capital gains taxes on the difference between your friend’s basis in that stock and the sales price. For example, if your friend owned stock in Y Corp., that she purchased for $1 dollar a share in 1982, and that stock is worth $100/share in 2013, you will owe capital gains on that $99/share rise in value. Alternatively, if she gives you that portfolio upon her death, you will inherit it at the current fair market value for capital gains tax purposes. In other words, if that Y Corp. stock is worth $100/share when your friend dies, and you later sell it at that price, you will owe zero in capital gains taxes. That portfolio will, however, be part of her taxable estate at her death, so, depending upon her other assets, her estate may or may not have to pay estate tax on those assets. (Currently, she can give up to $5.12 million at death free of estate tax.) So, you and your friend should seek the advice of an accountant to see whether it makes sense for your friend to give you that stock via a Will or a trust upon her death, or during her lifetime.
Category Archives: Estate Planning Basics
Dear Liza: I am the executor of my aunt’s estate in NJ. She left a number of payable-on-deaht (POD) accounts to me but her intention was that most of these funds/accounts be given to charity. I am trying to avoid paying estate and inheritance tax on them, because then the charities will get less. Is there a way I can redirect them to the charities before they come to me so as to avoid the taxes? When someone gives you something in a Will, or by beneficiary designation,you can always say, “No Thank You” and not accept the assets, provided you don’t make use of the asset first, and that you do this within 9 months of the death. This is called ‘disclaiming’ the assets. Legally, it’s as if you died first — the asset is then given to whomever is named as the next beneficiary. In that case, the gift is from the person who died, not from you. What you can’t do, however, is direct where the assets go next. So, if your aunt left a Will that said everything in her estate was to go to you, then to charity if you did not survive her, your disclaimer would direct those assets to the charity, via that Will. However, if your aunt’s Will did not specify charities as the next beneficiaries, or did not have a Will and simply left those payable-on-death accounts directly to you, and named no second beneficiary, the only way you can give those assets to charity would be to do it directly as a gift from you. If you disclaimed those assets, they would pass to your aunt’s surviving heirs under New Jersey’s law of intestate succession, not to charity. You can give $13,000 per year to any beneficiary free of the gift tax, or $26,000 if you are married and your spouse agrees to make the same gift.
Dear Liza: When putting property into a Living Trust does it trigger a tax reassessment under Prop 13? My parents purchased their property in 1968 and we didn’t want moving it into a Living Trust to trigger a reassessment. Nope. If your parents put their house into their own living trust, no reassessement is triggered. There are no ‘new’ owners, really. It’s just your parents owning the property under a different legal title. Putting property into a revocable trust for your own benefit is an exception to Prop. 13 reassessment. When your parents record the deed changing title to the trust, they will also need to file what’s called a Preliminary Change of Ownership Report (PCOR). This form tells the county assessor about the transaction. There are a whole list of checkboxes on the first page of the form, and one box is that the transfer is to or from a living trust. Once the assessor sees that, they know that they can’t reassess the property. Note: This is an issue for my California readers. Proposition 13 freezes property tax rates at a value that’s set when the property is purchased by a new owner. Needless to say, those with low property tax rates do NOT want to see that rate reassessed while they still own the property.
Dear Liza: My 91 year old mother had a stroke in April. Her living trust designates my brother as Medical Power of Attorney and myself as Financial POA. Her lawyer is asking for letters from two doctors stating our mother is mentally incapacitated before he can talk to both of us about her trust. Why would a lawyer ask for them? Wasn’t the point of the trust to make everything hassle free? Your mother’s lawyer is asking for letters from two doctors stating that your mother is incapable of managing her own affairs because, most likely, the trust states that you and your brother can act as successor Trustees only upon your mother’s incapacity. The trust probably also states that incapacity is to be determined by two letters from physicians stating, under penalty of perjury, that your mother is incapacitated. Many trusts are drafted this way. The idea is to protect your mother from having her powers as Trustee taken away unless she really can’t manage her own affairs. Ask the attorney to provide you with letters for the doctors to sign — that shouldn’t be a big deal if, in fact, she isn’t able to manage.
Dear Liza: My mother is 79 years old and is on social security. She and her brother own a house together. At this point, I really don’t care if her brother has control of the property. But I do care if the contents of the house are legally given to him. Does he have rights to the contents of the furniture in the house? Does my mother need a Will and would that Will prevent her estate from going into probate? Your mother’s furniture and furnishings are what’s called “tangible personal property.” This is lawyer-speak for all the stuff in her house: pots, pans, rubber bands, and the couch. That property will pass to you and your siblings if your mother executes a simple Will and gives her tangible personal property and any other assets she owns to her children. If the house is owned in joint tenancy, the surviving joint tenant (your uncle) would own the property upon your mother’s death, by what’s called “right of survivorship.” The house passes to him because of the way he and your mother owned it. But the tangibles, and anything else your mother owned other than the house, would pass to her kids via her Will. If all she really has at this point are those tangibles, no probate would be required because states exclude small estates from the necessity of a probate proceeding. Nolo offers a simple Will that would do the trick.
Dear Liza: It is my understanding that in order to preserve the “portability exemption” a surviving spouse must file an estate tax return (706), which would not be required otherwise. It seems that 706 involves quite a bit of work and additional expenses. Do you think it’s worth the effort? Surviving spouses of those who died in 2011 and 2012 have that decision to make. The problem is, there’s not an easy answer. For those who don’t know what the question is, here’s a quick summary: Current estate tax law allows a surviving spouse to use any part of the $5 million exclusion from the estate tax that was available to their deceased spouse but not used by that spouse. For example, if your spouse died in 2011, and their part of the estate was $1 million, you could use that extra $4 million dollars of unused exclusion to further reduce any estate tax due at your death. Your spouse’s exclusion would be portable to you. Except. There’s always an except. And this time there are couple of them, and they’re all pretty big:
- In order to make use of that exclusion, you do have to file an estate tax return nine months after your spouse has died.
- Estate tax returns require a detailed accounting of all of your spouse’s assets, which costs money and takes time to prepare.
- Once filed, the IRS can examine, without any limitation period, a deceased spouse’s estate tax return to adjust the amount of the deceased spouse’s unused exclusion amount passing to the surviving spouse.
- There’s no guarantee that the additional, portable, exclusion will actually be available to you when you die, unless you die in 2012, because the current law expires in 2013.
In the end, you have to decide whether the time and cost involved are worth the potential tax savings down the road. For some people it is; for many, it isn’t.
Dear Liza: My father passed away last fall and I have not received any notification of a Will. I am estranged from my family and my brothers have refused to tell me the name of any attorney or executor involved with the estate, and have refused to tell me if there is a Will. Is there any way to demand this information? There are state laws that require disclosure to you in certain circumstances, and if your family isn’t cooperating, those provide you the best chance to figure out what is going on. If your father died and did have a Will, the Will is supposed to be lodged with (filed with) the superior court in the county in which your father died by the executor within a certain period of time (which varies from state to state, but is 30 days in California). Once filed, the Will is a public record and you can get a copy by requesting it from the probate court. If there is no Will and your father owned property worth more than a certain amount (this also varies state to state, in CA it is $100,000 now and will be $150,000 as of January 1, 2012) the estate has to go through probate before anything can be distributed, unless your father had a surviving spouse. Probate is a court supervised settling of the estate: the Will is proven to be valid, the creditors are paid, the assets are appraised, and the estate is settled. If a probate proceeding is opened, you are required to get notice of it, as a surviving heir. Here’s a good summary of the California probate process. But, if your father died without a Will, and had less than the minimum required for probate, I’m not aware of any state disclosure laws that would provide you with information about his assets. If your father died without a Will, even if there’s no probate, you would, as a surviving heir, be entitled to a share of his assets, but enforcing that without family cooperation will be difficult.
Dear Liza: A friend of mine recently had a stroke and cannot sign her name, nor make an X, and her conversation is garbled. She doesn’t have a Will, a Living Trust, or a Durable Power of Attorney. How can we get something in place to take care of her financially? It sounds like you are going to need a conservatorship for your friend. This is a court proceeding where a judge appoints a responsible person or organization (that’s the ‘conservator’) to care for another adult (that’s the ‘conservatee’) who is no longer able to care for himself or herself or manage his or her finances. Here’s a link to the California Courts website on conservatorships. If your friend had signed a Durable Power of Attorney for Finances before she had that stroke, you wouldn’t need to go to court–which is why a Durable Power of Attorney is such an important document. Conservatorships are generally handled by elder law attorneys, and sometimes (but not always) by estate planning attorneys. California Advocates for Nursing Home Reform (CANHR) has a good directory of elder law attorneys. Hope this helps.
Hi Liza, I read from FAQ on the nolo website, “The $5 million exemption applies to property you give away during life or leave at your death. In other words, you can transfer, either while you are living or at your death, up to $5 million of property tax-free.” So, does it mean that I can pass a $1 million house to my children without any costs? now? If yes, what time is used as the tax basis? Yes, until the current law expires at the end of 2012, you could absolutely give that house to your children free of gift tax. But they would also get YOUR basis in the house for capital gains tax purposes. In other words, if you purchased that house for $25,000 in the 1970′s and now it’s worth $1 million, if you give that house to your kids, and they sell it, they will owe capital gains taxes on all of that gain. If you give them the house only upon your death, their basis in that property would be the fair market value of the property at your death, so all of that gain goes away. If you make the gift now, also, don’t forget to file a gift tax return by April 15th of the following year. You are still required to file that return, even though no tax is due.
Dear Liza, is it necessary to have both a last will and testament if you have a living trust? Yes, that’s the way it is usually done. There are two main reasons for this. First, if you have minor children, the Will is where you nominate guardians for them. But also the Will provides an important way to make sure your trust is the one set of instructions for who gets what and how it’s managed.
Here’s why: your trust holds the property that you transfer into it during your lifetime. You do this by either recording a deed (for real property) that transfers ownership from you as an individual to you as Trustee, or, in the case of a brokerage or bank account, by filing out paperwork that states that the account is owned by you, as Trustee. (These are called Change of Title Forms at most institutions; sometimes Trust Account Applications or something similar.) However, most people don’t actually transfer all of their assets into such a trust. When they die, often there are everyday checking and savings accounts, cars, or other assets outside of that trust. Sometimes they have simply forgotten to transfer accounts that should have gone into the trust or refinanced a house and taken that house out of the trust in the process, then forgotten to put it back in. So, that’s where the Will comes in–it’s usually a special kind of Will, called a ‘pour-over Will’–and it says that all such property should be poured into the trust/transferred into the trust after a person’s died. That way all of a person’s property will be distributed via the trust. A note of caution: if too much property is held outside of the trust, you will need a probate proceeding before you can transfer ownership to the trust (the trigger amount varies from state to state). So, don’t rely on that Will to make things work–make sure that your major assets are held by the trust during your lifetime.