Dear Liza: I am a 61 single retiree who has a single family home, an IRA, life insurance and a small pension. With my siblings as beneficiaries to these instruments. Is a living trust/will needed anyway? So, it’s true that if you have named beneficiaries for your IRA, life insurance and pension, those assets will go to those beneficiaries and your Will or Living Trust would have nothing to say about that part of your estate plan. But, here’s the thing–in most states you cannot name a beneficiary for a house. In those states, the only way to leave your house to certain people and avoid having to go through probate to do it, is to set up a living trust and transfer your house to that trust. Click here for a list of the states that do permit the transfer of a house by naming beneficiaries on a deed–called a transfer-on-death deed. Sadly, California is not one of them.
Category Archives: Estate Planning Basics
Dear Liza: My Dad passed away last year in the month of November. Prior to Daddy’s death, he was receiving monthly pension benefits. Once my step-mother notified the insurance company that Daddy had died, the company immediately withdrew his pension benefits from their checking account in the month of December. Up to this date, my step-mother hasn’t been able to receive Daddy’s pension benefits. Can the insurance company refuse to give my step-mother my dad’s pension benefits? Yes, they can. Pensions often terminate upon the death of the participant. Unlike an IRA or 401-K, traditional pensions are often promises of a monthly benefit for the lifetime of an employee, based on the length of time that employee worked for the company. (IRA’s and 401-K plans allow an employee to save their own money during their peak earning years on a tax-deferred basis, so that they can withdraw the money after they’ve retired. If they die with money left in those accounts, they can leave this money to a named beneficiary.) Sometimes, a pension plan allows an employee to elect to take less during their lifetime so that their surviving spouse can receive benefits during his or her lifetime, but not always. If your father had a plan that only paid him a pension during his lifetime, your stepmother wouldn’t be entitled to any benefits under the plan. Perhaps your stepmother can get clarification of how the pension worked from your father’s former employer.
Dear Liza: I am trying to prepare a living trust on behalf of my father. He owns his home and vehicles outright and also has two bank accounts. I am the POD beneficiary of all of his accounts, as well as being a secondary signer on his checking and savings accounts. My confusion comes from not knowing what assets should be put in the living trust. Should it just be the home, since that has the highest value? Or should the cars and bank accounts also be included? Or can everything but the house be designated in the pour-over will that I also intend to create? Your father’s living trust has just one purpose: to allow his estate to avoid probate upon his death. If your father’s assets are owned by the trust, not by him, when he dies, then his estate won’t need to go through probate. Not all items are subject to probate, though: retirement accounts, life insurance policies and bank accounts with designated beneficiaries (that’s what a POD account is), go directly to the named beneficiary. Cars can be transferred via the DMV, and so don’t need to go through probate either. So, for your Dad, that leaves his house. You should transfer legal ownership of the house to his trust by filing a trust transfer deed with the county. When you record the deed, you’ll also need to file a Preliminary Change of Ownership Form (PCOR). This form tells the county assessor what kind of transfer just happened; the assessor wants to know if they can raise property taxes on that property, which they can’t, because a transfer to or from a living trust is NOT a change of ownership under Proposition 13. That pour-over Will is just a backup for your Dad. If he doesn’t transfer his house to the trust, and then dies, the Will says transfer whatever property he owned at death to this trust (that’s the pour-over part). But, if the value of that property is more than $150,000, you’ll need to go through probate to make the transfer. Put another way, the Will makes sure that all of your father’s assets get distributed as directed by the trust, but it won’t help his estate avoid probate first.
Dear Liza: In settling an AB trust I understand that 50% of the estate is to be placed in each of the A and B trusts. However, in our estate our house is worth more than all of the other equity. How can the estate be settled? With percentages of the home? Put the home in which trust? That’s not a question you can answer in the abstract. Those decisions get made after the first spouse dies. First, you can’t know, now, what assets you’ll own then. Second, in an A/B trust, the assets of the deceased spouse are used to fund a trust, often called a “B” trust or a “Unified Credit Trust,” up to the amount of money that’s excluded from the federal estate tax in the year of the first spouse’s death. In 2012, that’s $5.12 million, but at the end of this year, that number falls to $1 million, unless Congress enacts new law. So, it’s not always going to “half” of the total trust estate, that will entirely depend upon the tax code in effect at the time your spouse dies. But, to answer part of the question you asked, the B Trust can be funded with a percentage of the house, and often is when there aren’t other assets that can be used to do so.
Dear Liza: We are pondering whether or not to assume a home that belongs to my wife’s parents. The home is currently being valued as part of an estate that will be designated to my wife and her brother. Our question is will the property tax be adjusted from its purchase price in 1968 to its current estate value? My wife’s parents lived in California. No. If your wife’s parents left their house to their son and daughter, the heirs can request an exclusion from reassessment from the county assessor where the house is located. A parent can leave their primary residence to their children and there will be no reassessment upon that transfer. Your wife and her brother can inherit the house and pay the property taxes that their parents paid. But they have to file a form requesting that exclusion from reassessment. This form, called a Claim for Reassessment Exclusion for Transfer Between Parent and Child (Proposition 58), can be downloaded at each county’s assessor website. Of course, if they someday sell the house to a new owner, that new owner’s property taxes will be calculated on the home’s new value.
Dear Liza: My cousin passed away in 2011, and she had a revocable living trust. My cousins inherited the assets 50/50. The assets were stocks. Do my cousins have to file income tax returns for what they received? Also, am I required to file an income tax return for the trust? Your cousins inherited the stocks at their value on the date your cousin died in 2011. Inheritances are NOT ordinary income under the federal tax code, so they receive those assets free of federal income tax. (We have a federal estate tax; if any tax was due, it would have been on your deceased cousin’s estate, if she owned more than $ 5 million in assets when she died.) Seven states have an inheritance tax, so they’ll need to check on whether any state inheritance tax is due. Your two cousins will be responsible for filing income taxes on any dividends they received after inheriting the stocks, and for any capital gains earned when they sell that stock if it has appreciated since they inherited it. You, as Trustee, would be responsible for filing a trust income tax return (Form 1041) if the trust earned more than $600 worth of income between the time your cousin died and the time the trust assets were distributed to the beneficiaries.
Dear Liza: What distinguishes an Estate from a Trust? A person’s estate is all of their property owned at death. If they have a Will, that document states who inherits the estate. If they die without a Will, state law determine who will inherit their estate. In both cases, if they have enough assets, a probate court has to supervise the settling of the estate. A trust is a legal agreement in which a person (called a Grantor) states that one or more people (called Trustees) hold the Grantor’s assets for certain people (called the beneficiaries) subject to certain duties and the terms of the agreement. The most common type of trust is called a revocable living trust, but there are others. A person may set up a living trust to hold certain of their assets (like their house) during their lifetime, and then give those assets to others at their death. Assets held in the living trust do not go through probate, which is why most people set them up.
But, that person almost certainly owns other assets in their own name (like their everyday checking account, their car, and their tangible personal property). Those things are part of that person’s estate, not their trust. They would ordinarily have a special kind of Will (called a pour-over Will) that says that all of these things should be added to their trust upon their death. That way, there’s just one set of instructions about who gets what.