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.
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.
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.
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.
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.