Category Archives: Uncategorized

Where the Gift Tax falls

Dear Liza: Currently, I own 1/3 of a condominium. My mom owns 1/3 and and brother owns 1/3.  My mom and brother (both alive) want to change the title to just my name.  Do my mom and brother have to pay gift tax or do I have to pay gift tax?   I read on IRS.gov that $5 million free of gift tax during my lifetime is only for estate tax and 13,000 is gift tax each year. Don’t you have to be dead to receive estate tax? So many good questions here.  I will answer, with this caveat: if Congress makes a deal with the President, some of what I have to say may change. As of RIGHT NOW (December 30th, 2012), the donor of the gift (your mother and your brother) are liable for any gift tax due on the transaction, not the donee (that’s you). But, unless that’s one pricey condo, they’re not likely to actually owe any gift tax at all.
Until tomorrow, each person is allowed to give up to $5.12 million, free of gift tax.  This ‘magic  number’ currently applies to all lifetime gifts, or gifts made at death. That number is scheduled to go down to $1 million on January 1, 2013–but still, what that means is your mother and brother would have to file a gift tax return by April of the year following the gift and report the value of the gift (this will require an appraisal to document that value).  If the value of the gift is less than the available magic number, no tax is actually due (but they’ll have used up some of their lifetime ability to give free of gift or estate tax).
That $13,000 gift is called an ‘annual exclusion gift’ and it can be made entirely free of tax, each year, and as long as no gift to any individual exceeds the annual exclusion, no gifts need to be reported at all. The annual exclusion is scheduled to increase to $14,000 in 2013.
I can’t tell from your question where you live. But in California, where I practice, the gift you describe will also result in a partial reassessment of your property taxes,  so please make sure that you also understand the property tax issues raised by the gift you contemplate.

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.

Funding subtrusts after the death of the first spouse

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.

401(k) Beneficiaries

Dear Liza: My wife and each have two children from prior marriages. One of her children is a homeless alcoholic who has no desire to become sober.  I wish to prevent the 401k money from going into my wife’s estate which would have only her two children as default beneficiaries. This would allow the irresponsible child to inherit half of the estate. I want the to have the final beneficiaries to be the 3 responsible children. Can I do that?  401(k) plans are regulated under federal law.  You must name your spouse as your primary beneficiary, unless she signs an effective waiver.  (But if she needs that money to live on after your death, she probably would not agree to waiving her rights in that way.)  You could name a trust as your secondary beneficiary, and,  the three ‘responsible’ children could be the beneficiaries of that trust, but, if you do that, you are going to limit their ability to withdraw that money in a tax-efficient way. They will have to use the age of the oldest trust beneficiary to determine how much money they have to withdraw each year: which means that the younger ones will have to take money out more quickly (and pay more tax) than they otherwise would.  And, if your spouse survives you, she will be able to roll that 401K into her own IRA, and then name whichever beneficiaries she chooses.   But she doesn’t have to name both of her children as her beneficiaries.  She can structure her estate in a way that makes sense for both of her children.  She could, for example, name only her responsible child as the beneficiary of her IRA, or she could leave the share for her troubled child in trust for his or her benefit via a living trust or a Will.

Amending or Restating A Living Trust

Hi Liza,  I have a living trust and I’m the trustee in the trust.  I have a will in the trust.  I wanted to make some changes to the will and I’ve been told by my lawyer that I would have to
make another trust if I want to change the people in my will.  If the will doesn’t have to go to probate why can’t I just make the changes in the will and have my designated
trustee distribute my estate after I’m dead?  One of the people in my will has died, one is in a nursing home and two I haven’t heard from in years.  This doesn’t make
any sense to me.  Can you explain this to me? Well, truthfully, now I’m a tiny bit confused. It sounds like you have a trust, and in that trust you leave assets to various people. (I think that’s what having a “will in the trust” means.) Assuming that you are the Grantor of that trust (the person who established it) and it’s a revocable trust, you can certainly amend the trust to reflect your current intentions. It is common that we lose touch with people over the years, or change our minds about what we want to do with our assets over time. To make a small change to an existing document you would have your lawyer draft a trust amendment for you to sign, changing whatever sections of the existing trust needs revising. If you are making a lot of changes, you’d do what’s called a Restatement of Trust, which is like having an all-new trust with all current terms, but with the same name as the old trust, so you don’t need to retitle assets that are already in it. Maybe that’s what your lawyer meant by a “new trust.”

Do heirs have to pay credit card debts?

Dear Liza: My mother recently died, leaving a $25,000 credit card debt.  There isn’t enough money in her estate to pay that bill.  What should I do? You are not personally responsible for that debt. Credit card debt is unsecured debt–unlike, say, a house or a car loan, that is secured by the value of the underlying asset (the house or the car).  A creditor can go after the assets in your mother’s estate to try and collect on that debt, but they can’t come after you personally. Sadly, many unscrupulous collection agencies ‘forget’ to tell heirs that, implying that they are on the hook for the money. You should notify the credit card company that your mother had died and that she didn’t leave enough money to pay the debt. Many card companies will settle for pennies on the dollar (because, really, they know that only the estate is liable, not you.) Good luck.

Hey, I’m not the beneficiary of my Dad’s IRA, can he do that?

Dear Liza: My father recently died. My mother died years ago. I just assumed that I’d be the beneficiary of my father’s IRA, and I paid all of the funeral costs and other costs associated with my father’s death. Altogether, that came to about $8,000. When I contacted the IRA plan administrator, they told me that I wasn’t the beneficiary. They wouldn’t even tell me who the beneficiary was! Turns out it is my uncle. Can I open a case in probate court to challenge this? That should be my money.  I hate to be the bearer of bad news, but you really can’t go to court to challenge this unless you think there is something fraudulent about the beneficiary designation that named your uncle (for example, the signature was forged or your father was forced to do it). And even then, it wouldn’t be a probate matter, as assets passing by beneficiary designation don’t go through probate.  Your father had the right to name anyone he pleased as the beneficiary of his IRA.  Maybe he named his brother long ago, and just forgot to change it to you. That happens sometimes. But whatever reason he had, the money goes to the named beneficiary, period. You might appeal to your uncle’s good nature and sense of fairness, but you can’t obligate him to share.