Category Archives: Gifting

Should We Get Married? Estate Planning for Same Sex Couples Now

wedding-91797_150Dear Liza: My long term domestic partner of 30 years and I were registered domestic partners for a few years and then she decided she wanted to be totally financially independent of me so we terminated the agreement last year.  We are still together as a couple and live five minutes away from each other.  Our intention is to leave everything we own to each other and have named each other as executors in our wills.  She owns a house that she may or may not be selling but in general our estates are pretty modest.  I am wondering since we are still a couple is there is an advantage in terms of avoiding probate in getting married versus doing a living trust? First, can I just say I love being able to have this conversation! Now, down to business. There’s a lot packed into your question. I’m going to answer on a general level, but I think it would be worth it for you and your partner to sit down with an accountant and an attorney and see how my advice addresses your particular concerns.

There are three key  estate planning advantages to getting married for same sex couples now, but I wouldn’t frame it as a living trust versus marriage. That’s kind of apples and oranges.  A living trust will still allow you to transfer your assets to each other without probate, regardless of whether or not you marry. But being married has two key federal and one state TAX advantage, all of which you’d realize with or without a living trust.

1.  Married couples get a step up in basis when one spouse dies on all community property assets. That means that the surviving spouse won’t have to pay capital gains on any appreciated assets that she sells after the first death, other than any gain that happened after the death of the first spouse.  For example, if your partner’s house has appreciated a lot since she bought it, and you marry and make that house community property, when one of you dies, that house would be valued at its date of death value, not the original purchase price.

2. Married couples get an unlimited marital deduction from federal estate and gift tax.  That means that you and your spouse can give an unlimited amount of assets to each other, at death or during life, and no federal estate or gift tax will be due for those gifts. For those with modest estates (which are most of us) this isn’t as big a concern now that the federal estate and gift tax exemption is $5.25 million, but that number may be reduced by Congress in the future, and it is a benefit that only spouses receive.  This, in fact, was the basis for Edie Windsor’s challenge to DOMA.

3. Married couples can pass real property to each other in California without a change in property tax rates.  A transfer between spouses is an exception to Proposition 13’s reassessment requirement.  Since you and your partner terminated your Registered Domestic Partnership, and it sounds like she purchased the property alone, her transfer of the house to you via a Will would trigger a change of ownership and reassessment for at least 1/2, if not all, of the property, depending on how she holds title at her death.

Change of Ownership Means Reassessment

house from momDear Liza:  I live in California. I have no children or family. If I leave my house to a friend will the property taxes go up under Prop 13? I just find information about kids and trusts, but not unrelated persons inheriting.  Yes, if you leave your house to a friend, the property taxes will be reassessed. The way Proposition 13 works is that any “change of ownership” results in a reassessment of that property based on its current fair market value, unless an exception applies.  There are exceptions to reassessment for a transfer of property from parents to children (or children to parents).  There is an exception to reassessment for a transfer of property from an individual to a revocable trust for his or her benefit.  But there is no exception for a transfer from you to your friend.

Annual Gifts and Lifetime Gifts

gift packageDear Liza, I would like to give my son $200k to upgrade homes.  Can me and my wife each give $13,000 to my son, daughter in law, and two grand children?  That would be $102,000, and then apply the remaining $98,000 to the unified tax credit.  Can I write it all in one check for the four of them? You can write one check for your son and daughter. You can now give $14,000 per person, so you and your wife can give, together, $56,000 to them, as an annual gift, and the remainder can be reported on your gift tax return, filed in April of the following year. If your grandchildren are minors, though, you have to give them a gift into a custodial account, a trust, or a 529 educational savings plan.  Children under the age of 18 can’t own property worth more than a nominal amount without a custodian to manage that money.

Who pays tax on gifts?

White Gift Box with Red Satin Ribbon BowDear Liza: My brother gave me two checks totaling $200,000 in 2012 as a gift.  Who pays the tax on that? You have a generous brother! And, in the no good deed goes unpunished department,  it is the DONOR of the gift (your brother) who is responsible for reporting the gift and paying the tax due, if any. You, the DONEE, receive the gift free of tax because gifts are not ordinary income under the income tax rules.  In 2012, gifts under $5.12 million dollars are not subject to gift tax, but any gift over $13,000 must be reported on a gift tax return by April, 2013.  Your brother must file that return, which tells the IRS that he made you a gift of $200,000.  Assuming he hasn’t made other gifts that exceed that $5.12 million, though, no tax will be due.  Instead, by reporting the gift, your brother has used up some of his lifetime gift tax credit–the tax that would otherwise be due on a gift of $200,000.

Transferring a house from a trust

 Dear Liza: My grandfather died in 2008. My mother is the first successor on the trust. We did all the post administration for the trust or so we thought. I recently read that my mother should have filed a deed to get the house placed into her name since that is what the trust called for. We have not done this. My question is the following…My mother wants the house to go to me, her son. What process would we have to do in order to get it from the trust to me? Your grandmother can file the deed she didn’t file after your grandfather died, getting the house into your grandmother’s name, as Trustee of the trust created by your grandfather. Once that’s done, her ability to give that house to you during her lifetime depends upon the terms of the trust your grandfather set up. She may be able to give it to you during her lifetime, in which case you will receive it at the value that it had in 2008, when your grandfather died.  She may only be able to transfer it to you at her death, in which case you will inherit it at the value the house has at her death.  She may not be able to give it to you at all, because, as you said, the terms of your grandfather’s trust became irrevocable at his death. I would advise you to see an estate planning attorney in your state to review your grandfather’s trust and advise your grandmother on the best strategy to accomplish her goals.

As for that mortgage, if you get the property transfer completed, you’ll have to request that the lender assume the loan in your own name, which they may or may not do, that depends on their calculations and your credit history.

Giving away that family cabin

Dear Liza: I am divorced and own a second vacation cabin that I want my children to have when I die.  Is there a way for me to retain rights, ownership and control while I am alive and of sound mind but pass the property to them when I die that doesn’t have a bunch of overwhelming taxes?  Yes.  Upon your death you can leave the kids the cabin either outright or in a trust. If you leave it to them outright, as tenants in common, each will own 1/2 and can leave their half to whomever they choose when they die. If you leave it to them in trust, you can control how it’s managed and how it would be transferred upon their deaths (as in maybe it has to go to their children or be sold to other family members.) The tax treatment of the gift is that it will go to them free of tax — if there’s a tax to pay, it falls on your estate, but they inherit what’s left free of tax.  The capital gains tax basis on the property will be what it is on your date of death, so if they sell it someday, they’ll owe tax on the gain in value from your date of death to the date of sale. I don’t know what state you live in, but in California, where I practice, a gift from parent to children is also excluded from reassessment of property tax, so they get the property tax rate you were paying.

Capital gains and lifetime gifts

Dear Liza,
My dad has transferred $13,000 in stock for several years to me.  I would like to transfer some stock to my son who in turn would like to sell that stock to help purchase a house. Who will owe the capital gain taxes?  For example say the stock was worth $20 a share when transferred to me but when I transfer to my son it is worth $40 a share.  Gifts given during life (from your father to you; from you to your son) retains the donor’s basis: so, for capital gains purposes, the stock is still worth $20 a share when you give it to your son, because that’s what the basis in the stock was when your father gave it to you.  If you give it to your son, and he sells it, he will pay the capital gains on the sale.

Should I add my son to the title of my house?

Dear Liza: I thought about putting my son on the title of my house so he would have additional financial support. I’m not just real comfortable with that idea. I know creditors can and do go after people with ownership to a home.My son is doing well, but he does have a large student loan he needs to repay. What do you think about my adding him to the title of my house?  I think you should listen to that inner voice that isn’t comfortable with the idea.  You are absolutely right that adding him to the title puts your assets at risk to his creditors.   Also, if you put him on title, you are making a taxable gift to him of one-half the value of the house and you should report that on a gift tax return by April 15th of the following year. (You won’t owe any gift tax, most likely, because at the moment you can give up to $5.12 million without having to pay gift tax, but you still have to report any gift over $13,000.)  Finally, he will get your one-half of the house with a capital gains tax basis of what you paid for that house (and I’m guessing it’s appreciated since then.)  If he ever does sell it, he’ll owe capital gains taxes on the amount it’s appreciated since you purchased it.  You can leave him the house at your death, if that’s what you want to do, but for now, I wouldn’t recommend it.

Lifetime Gifts

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.

That $5 Million Exemption

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.