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Would Life Estate Have an Impact Taxes on an Inherited Home?

Nj.com’s recent article entitled “My mom added us to her deed and then died. Do we owe taxes?” explains that assuming mom retained an interest in the house or lived in the house after putting her children’s names on the deed, the IRS considers the property to be part of the taxable estate of the mother.

That is a critical point, when it comes to the amount of tax the children may have to pay.

She most likely kept a “life estate” in the home. This is where a person owns the property only through the duration of their lifetime. It is called “a tenant for life” or a “life tenant.”

A life estate is a restriction on the property because it prevents the beneficiary (usually the children) from selling the property that produces the income before the beneficiary’s death.

When the mom passes away, the life estate automatically stops and the children now have all of the rights associated with the property. As to income tax, when the parent dies, the property receives a “step up” in basis to the date of death value.

If the mom in our example had a life estate, the children would receive a “step up” in basis to the fair market value of the property on the date of death.

That means that the capital gain that would be taxed to the children would be the difference between the fair market value of the property when their mother died and the net proceeds of the sale.

Retaining the life estate can help a child avoid the capital gains tax more effectively than a simple transfer of the property outright to the child.

Talk to an experienced estate planning attorney about life estates and taxes, when you inherit a home.

Reference: nj.com (Feb. 18, 2021) “My mom added us to her deed and then died. Do we owe taxes?”

Estate Planning Meets Tax Planning

Not keeping a close eye on tax implications, often costs families tens of thousands of dollars or more, according to a recent article from Forbes, “Who Gets What—A Guide To Tax-Savvy Charitable Bequests.” The smartest solution for donations or inheritances is to consider your wishes, then use a laser-focus on the tax implications to each future recipient.

After the SECURE Act destroyed the stretch IRA strategy, heirs now have to pay income taxes on the IRA they receive within ten years of your passing. An inherited Roth IRA has an advantage in that it can continue to grow for ten more years after your death, and then be withdrawn tax free. After-tax dollars and life insurance proceeds are generally not subject to income taxes. However, all of these different inheritances will have tax consequences for your beneficiary.

What if your beneficiary is a tax-exempt charity?

Charities recognized by the IRS as being tax exempt don’t care what form your donation takes. They don’t have to pay taxes on any donations. Bequests of traditional IRAs, Roth IRAs, after-tax dollars, or life insurance are all equally welcome.

However, your heirs will face different tax implications, depending upon the type of assets they receive.

Let’s say you want to leave $100,000 to charity after you and your spouse die. You both have traditional IRAs and some after-tax dollars. For this example, let’s say your child is in the 24% tax bracket. Most estate plans instruct charitable bequests be made from after-tax funds, which are usually in the will or given through a revocable trust. Remember, your will cannot control the disposition of the IRAs or retirement plans, unless it is the designated beneficiary.

By naming a charity as a beneficiary in a will or trust, the money will be after-tax. The charity gets $100,000.

If you leave $100,000 to the charity through a traditional IRA and/or your retirement plan beneficiary designation, the charity still gets $100,000.

If your heirs received that amount, they’d have to pay taxes on it—in this example, $24,000. If they live in a state that taxes inherited IRAs or if they are in a higher tax bracket, their share of the $100,000 is even less. However, you have options.

Here’s one way to accomplish this. Let’s say you leave $100,000 to charity through your IRA beneficiary designations and $100,000 to your heirs through a will or revocable trust. The charity receives $100,000 and pays no tax. Your heirs also receive $100,000 and pay no federal tax.

A simple switch of who gets what saves your heirs $24,000 in taxes. That’s a welcome savings for your heirs, while the charity receives the same amount you wanted.

When considering who gets what in your estate plan, consider how the bequests are being given and what the tax implications will be. Talk with your estate planning attorney about structuring your estate plan with an eye to tax planning.

Reference: Forbes (Jan. 26, 2021) “Who Gets What—A Guide To Tax-Savvy Charitable Bequests”

Does Living Trust Help with Probate and Inheritance Taxes?

A living trust is a trust that’s created during a person’s lifetime, explains nj.com’s recent article entitled “Will a living trust help with probate and inheritance taxes?”

For example, New Jersey’s Uniform Trust Code governs the creation and validity of trusts. A real benefit of a trust is that its assets aren’t subject to the probate process. However, the New Jersey probate process is simple, so most people in the Garden State don’t have a need for a living trust.

In Kansas, a living trust can be created if the “settlor” or creator of the trust:

  • Resides in Kansas
  • The trustee lives or works in Kansas; or
  • The trust property is located in the state.

Under Florida law, a revocable living trust is governed by Florida Statute § 736.0402. To create a valid revocable trust in Florida, these elements are required:

  • The settlor must have capacity to create the trust
  • The settlor must indicate an intent to create a trust
  • The trust must have a definite beneficiary
  • The trustee must have duties to perform; and
  • The same person can’t be the sole trustee and sole beneficiary.

Ask an experienced estate planning attorney and he or she will tell you that no matter where you’re residing, the element that most estate planning attorneys concentrate on is the first—the capacity to create the trust. In most states, the capacity to create a revocable trust is the same capacity required to create a last will and testament.

Ask an experienced estate planning attorney about the mental capacity required to make a will in your state. Some state laws say that it’s a significantly lower threshold than the legal standards for other capacity requirements, like making a contract.

However, if a person lacks capacity when making a will, then the validity of the will can be questioned. The person contesting the will has the burden to prove that the testator’s mental capacity impacted the creation of the will.

Note that the assets in a trust may be subject to income tax and may be includable in the grantor’s estate for purposes of determining whether estate or inheritance taxes are owed. State laws differ on this. There are many different types of living trusts that have different tax consequences, so you should talk to an experienced estate planning attorney to see if a living trust is right for your specific situation.

Reference: nj.com (Jan. 11, 2021) “Will a living trust help with probate and inheritance taxes?”

Estate Battle with Millions at Stake in New Orleans

Jessica Fussell Brandt filed an eviction petition against her daughter, Julie Hartline, her son-in-law Darryl Hartline and two grandchildren, Alexis and Zachary Hartline. She is pitted against them in a legal fight over an estate valued at more than $300 million, reports nola.com in the article “In Ray Brandt estate battle, widow tries to evict family from Old Metairie compound.”

Before auto magnate Ray Brandt died at age 72 from pancreatic cancer, the entire family shared a compound that includes two mansions located next to the Metairie Country Club. Brandt has been trying to sell the property which belongs to the estate, as its executrix. The family members living there don’t want to move, even taking down “For Sale” signs from the lawn.

Her attempt to evict them comes after she won a case in her attempt to maintain control of her late husband’s estate, which includes a large number of auto dealerships and collision centers across Louisiana and Mississippi.

On January 25, a Jefferson Parish judge invalidated the last will and testament that Ray Brandt signed just weeks before his death and another last will drafted in 2015. The district judge ruled that both last wills contained a flaw in how they were notarized: neither notarization specified that Ray Brandt, the witnesses, and the notary were together when it was signed.

The decision is being appealed, but it appears to leave the fate of Brandt’s empire to a last will he made in 2010. Unlike the others, this last will places Jessica Brandt in full control of his estate and trust, including the auto dealerships, until her death.

Ultimately, Ray Brandt directed that her grandchildren, who he legally adopted as adults before he died, would split the estate’s assets.

Despite issuing a statement saying that Jessica was “pleased with the prospect beginning the healing process,” after the Jefferson Parish decision, the eviction filing revealed that Jessica’s attorneys sent an email urging family members to leave the property by January 31, 2021.

Jessica made a statement that her wish to evict family members was a result of the multiple citations issued by Jefferson Parish for continuing violations at the compound. The latest one was for a trailer and mud buggy parked in a driveway on a vacant lot. She also said that the family members own two other homes, one in Metairie and one in Fort Beauregard.

The compound where the family settled seven years ago is estimated to be worth more than $8 million.

The heart of the dispute pits Jessica Brandt against Archbishop Rummel High School principal Marc Milano, who Ray Brandt named as a trustee to oversee the auto group and the rest of the estate until Jessica Brandt dies. Milano has accused Jessica of taking money from the estate and trying to claim an ownership interest in the dealership. She sued him for defamation.

Now the grandchildren have filed their own legal action, challenging a petition to put Ray Brandt’s last will into effect. Their argument is the trust that Ray Brandt set up in 2015 makes it clear that he meant for Milano to oversee the assets.

This estate battle will no doubt keep the Jefferson Parish courts and newspapers busy for some time. It’s a lesson to keep your family’s business private, by ensuring that your estate plan is properly prepared and up to date.

Reference: nola.com (Feb. 3, 2021) “In Ray Brandt estate battle, widow tries to evict family from Old Metairie compound”

Should I Worry about Medicaid Estate Recovery?

What is It? The Medicaid Estate Recovery Program (MERP) may be used to recoup costs paid toward long-term care. It’s designed to help make the program affordable for the government, but it can financially affect the beneficiaries of Medicaid recipients.

AOL’s article entitled “What Is Medicaid Estate Recovery?” explains that’s where Medicaid can help fill the void. Medicaid can assist with paying the costs of long-term care for aging seniors. It can be used when someone doesn’t have long-term care insurance coverage, or they don’t have the assets to pay for long-term care out of pocket. It can also be used to pay for nursing home care, if you’ve taken steps to protect assets using a trust or other estate planning tools.

However, the benefits you (or an aging parent) receive from Medicaid are not necessarily free. The Medicaid Recovery Program lets Medicaid recoup or get back the money spent on behalf of an aging senior to cover long-term care costs. Federal law requires states to attempt to seek reimbursement from a Medicaid beneficiary’s estate when they die.

How It Works. The Medicaid Estate Recovery Program lets Medicaid seek recompense for a variety of costs, including:

  • Nursing home-related expenses or other long-term care facility stays
  • Home- and community-based services
  • Medical services from a hospital (when the recipient is a long-term care patient); and
  • Prescription drug services for long-term care recipients.

If you (or an aging parent) die after receiving long-term care or other benefits through Medicaid, the recovery program allows Medicaid to pursue any eligible assets held by your estate. Exactly what that includes depends on your state, but generally any assets that would be subject to the probate process after you pass away are fair game.

That may include bank accounts you own, your home or other real estate and vehicles or other real property. Each state makes its own rules. Medicaid can’t take someone’s home or assets before they pass away, but it’s possible for a lien to be placed upon the property.

What Medicaid Estate Recovery Means for Heirs. The biggest thing about the Medicaid estate recovery for heirs of Medicaid recipients is that they might inherit a reduced estate. Medicaid estate recovery rules also exclude you personally from paying for your parents’ long-term care costs. However, filial responsibility laws don’t. It is rare, but the laws of some states let healthcare providers sue the children of long-term care recipients to recover nursing care costs.

How to Avoid Medicaid Estate Recovery. Strategic planning with the help of an elder law attorney can help you or your family avoid financial impacts from Medicaid estate recovery. You should think about buying long-term care insurance for yourself. A long-term care insurance policy can pay for the costs of nursing home care, so you can avoid the need for Medicaid altogether.

Another way to avoid Medicaid estate recovery is to remove assets from the probate process. For example, married couples can do this by making certain that assets are jointly owned with right of survivorship or using assets to purchase an annuity to transfer benefits to the surviving spouse when the other spouse passes away. You should know which assets are and are not subject to probate in your state and whether your state allows for an expanded definition of recoverable assets for Medicaid. Speak with an experienced elder law lawyer for assistance.

Medicaid estate recovery may not be something you have to concern yourself with, if your aging parents leave little or no assets in their estate. However, you should still be aware of it, if you expect to inherit assets from your parents when they die.

Reference: AOL (Feb. 5, 2021) “What Is Medicaid Estate Recovery?”

What States Make You Pay an Inheritance Tax?

Let’s start with defining “inheritance tax.” The answer depends on the laws of each state, so you’ll need to speak with an estate planning attorney to learn exactly how your inheritance will be taxed, says the article “States with Inheritance Tax” from yahoo! finance. There are six states that still have inheritance taxes: Iowa, Kentucky, Nebraska, New Jersey, Maryland and Pennsylvania.

In Iowa, you’ll need to pay an inheritance tax within nine months after the person dies, and the amount will depend upon how you are related to the decedent.

In Kentucky, spouse, parents, children, siblings and half-siblings do not have to pay inheritance taxes. Others need to act within 18 months after death but may be eligible for a 5% discount, if they make the payment within 9 months.

Timeframes are different county-by-county in Maryland, and the Registrar of Wills of the county where the decedent lived, or owned property determines when the taxes are due.

Only a spouse is exempt from inheritance taxes in Nebraska, and it has to be paid with a year of the decedent’s passing.

New Jersey gets very complicated, with a large number of people being exempted, as well as qualified religious institutions and charitable organizations.

In Pennsylvania, rates range from 4.5% to 15%, depending upon the relationship to the decedent. There’s a 5% discount if the tax is paid within three months of the death, otherwise the tax must be paid within nine months of the death.

As you can tell, there are many variations, from who is exempt to how much is paid. Pennsylvania exempts transfers to spouses and charities, but also to children under 21 years old. If one sibling is 20 and the other is 22, the older sibling would have to pay inheritance tax, but the younger sibling does not.

There’s also a difference as to which property is subject to inheritance taxes. In Nebraska, the first $40,000 inherited is exempt. Pennsylvania exempts certain transfers of farmland and agricultural property. All six exempt life insurance proceeds when they are paid to a named beneficiary, but if the policies are paid to the estate in Iowa, the proceeds are subject to inheritance tax.

Note that an inheritance tax is different than an estate tax. Both taxes are paid upon death, but the difference is in who pays the tax. For an inheritance tax, the tax is paid by heirs and the tax rate is determined by the beneficiary’s relationship to the deceased.

Estate tax is paid by the estate itself before any assets are distributed to beneficiaries. Estate taxes are the same, regardless of who the heirs are.

There are twelve states and the District of Columbia (Washington D.C.) that have their own estate taxes (in addition to the federal estate tax). Note that Maryland has an inheritance, state and federal estate taxes. The rest of the states with an estate tax are Connecticut, Hawaii, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Washington and Vermont.

The large variations on estate and inheritance taxes are another reason why it is so important to work with an experienced estate planning lawyer who knows the estate laws in your state.

Reference: yahoo! finance (Jan. 6, 2021) “States with Inheritance Tax”

What are My Taxes on a House I Inherited?

Say your mom transferred the deed of the house over to you in November 2014 with a life estate for her. She dies in 2016. Mom paid about $18,000 for the home in 1960. This is the son’s primary and only residence. He wants to put the house on the market for $375,000. Will he have to pay capital gains tax?

The son probably won’t owe any tax on the sale of the house. Nj.com’s recent article entitled “Will sale of inherited home cause a tax liability?” explains that the profit can be calculated, by subtracting the cost basis from the sales price. That cost basis is the original purchase price plus any capital improvements.

As far as the son’s repairs, he should look at capital improvements, which is somewhat nebulous. The IRS definition is “add to the value of your home, prolong its useful life, or adapt it to new uses.” Any improvements must be evident when you sell. If you replace a few shingles on your roof, it is a repair. However, if you replace the whole roof, that’s a capital improvement. If you don’t have receipts for the capital improvements, you can use reasonable estimates. However, the IRS may not accept them, if you’re audited.

Inherited property receives a “step up” in cost basis to the fair market value as of the date of death. This means that the original purchase price of the property and any capital improvements prior to the date of death are no longer relevant.

If a property is sold after it is inherited, the profit is calculated by deducting the date of death value from the sales price with an adjustment for any capital improvements made to the property after the date of death.

As far as the mom’s life estate in the home, this is a special type of real estate ownership, where the owner retains the exclusive right to live in the property for as long as she’s alive. However, a remainder interest is given to someone else, like a child. This “remainderman” automatically becomes the owner of the property upon the death of the life tenant.

Even with the life estate, the home receives a full step-up in cost basis upon the death of the life estate owner. The first $250,000 of profit on the sale of a primary residence is also exempt from tax, as long as the seller owned the home and lived in the home for two out of the last five years.

As such, the basis of the home will be the fair market value of the home in 2016, when the son inherited it as the remainderman of the life estate deed, plus any capital improvements he made since then.

In this situation, because the son has owned and lived in the house for two out of the last five years, he can exclude up to $250,000 of profit. With estimated sale price of $375,000, he shouldn’t owe any capital gains tax.

Reference: nj.com (Dec. 31, 2020) “Will sale of inherited home cause a tax liability?”

Control of Assets a Key Issue in Deciding on a Trust

Any trust created while the person, known as the “grantor,” is living, is known as a “living trust.” However, the term is also used interchangeably with “revocable trusts,” which can be changed according to the grantor’s wishes. During the lifetime of the grantor, as explained in the recent article “Control of Assets a Key Issue in Deciding on a Trust” from FED Week, that person can be the trustee as well as the beneficiary. Control is retained over the trust and the assets it contains.

Trusts are used in estate plans as a way to avoid probate. Equally importantly, they can provide for an easier transition if the grantor becomes incapacitated. The co-trustee or successor trustee steps in to manage assets, and the process is relatively seamless. The family, in most cases, will not have to apply for conservatorship, an expensive and sometimes unnerving process. Within the privacy afforded a trust, the control and management of assets is far less stressful, assuming that the trust has been funded and all assets have been placed properly within the trust beforehand.

Naming a successor trustee so the grantor may remain in control during his or her lifetime is an easier concept for most people. However, adding a co-trustee rather than a successor may be a wiser move. A successor trustee requires the grantor, if still living, to formally resign and allow the successor trustee to take control of the trust and its assets.

If a co-trustee is named, he or she may step into control instantly, if the grantor becomes incapacitated.

Trusts fall into two basic categories:

Irrevocable Trusts—A permanent arrangement in which assets going into the trust are out of control of anyone but the trustee. Giving up this control comes with benefits: the assets within the trust may not be tapped by creditors and they are not considered part of the estate, also lowering tax liability. Irrevocable trusts are generally used to protect loved ones, who are named as beneficiaries.

Revocable Trusts—The grantor retains control over trust assets and may collect investment income from assets in the trust. If the grantor decides to have the assets back in his or her personal accounts, they can be reclaimed into his or her own name.

The revocable trust protects the grantor against incompetency, as the successor trustee or co-trustee can take over management of trust assets and assets pass to designated recipients without having to go through probate.

Determining which of these trusts is best for your family depends on many different factors. Speak with an experienced estate planning attorney to learn how trusts might work within your unique estate plan.

Reference: FED Week (Jan. 21, 2021) “Control of Assets a Key Issue in Deciding on a Trust”

The Difference between Power of Attorney and Guardianship for Elderly Parents

The primary difference between guardianship and power of attorney is in the level of decision-making power, although there are many intricacies specific to each appointment, explains Presswire’s recent article entitled “Power of Attorney and Guardianship of an Elderly Parent.”

The interactions with adult protective services, the probate court, elder law attorneys and healthcare providers can create a huge task for an agent under a power of attorney or court-appointed guardian. Children acting as agents or guardians are surprised about the degree of interference by family members who disagree with decisions.

Doctors and healthcare providers don’t always recognize the decision-making power of an agent or guardian. Guardians or agents may find themselves fighting the healthcare system because of the difference between legal capacity and medical or clinical capacity.

A family caregiver accepts a legal appointment to provide or oversee care. An agent under power of attorney isn’t appointed to do what he or she wishes. The agent must fulfill the wishes of the principal. In addition, court-appointed guardians are required to deliver regular reports to the court detailing the activities they have completed for elderly parents. Both roles must work in the best interest of the parent.

Some popular misperceptions about power of attorney and guardianship of a parent include:

  • An agent under power of attorney can make decisions that go against the wishes of the principal
  • An agent can’t be removed or fired by the principal for abuse
  • Adult protective services assumes control of family matters and gives power to the government; and
  • Guardians have a responsibility to save money for care, so family members can receive an inheritance.

Those who have a financial interest in inheritance can be upset when an agent under a power of attorney or a court-appointed guardian is appointed. Agents and guardians must make sure of the proper care for an elderly parent. A potential inheritance may be totally spent over time on care.

In truth, the objective isn’t to conserve money for family inheritances, if saving money means that a parent’s care will be in jeopardy.

Adult protective services workers will also look into cases to make certain that vulnerable elderly persons are protected—including being protected from irresponsible family members. In addition, a family member serving as an agent or family court-appointed guardian can be removed, if actions are harmful.

Agents under a medical power of attorney and court-appointed guardians have a duty to go beyond normal efforts in caring for an elderly parent or adult. They must understand the aspects of the health conditions and daily needs of the parent, as well as learning advocacy and other skills to ensure that the care provided is appropriate.

Ask an experienced elder law attorney about your family’s situation and your need for power of attorney documents with a provision for guardianship.

Reference: Presswire (Jan. 14, 2021) “Power of Attorney and Guardianship of an Elderly Parent”

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