Michigan Estate Planning Blog

Should All of My Assets Be in a Trust?

 

By now, you may have heard about the “great wealth transfer,” which refers to Americans inheriting as much as $72 trillion over the next twenty years. Do you have a plan in place for your family? A recent article, “Is a Living Trust Really the Best Way to Pass an Inheritance to Your Family?” from The Motley Fool, explains how this estate planning tool works.

How does wealth pass to heirs? One way is a Last Will and Testament. However, a Living Trust may be better. The Living Trust is the creation of a legal entity, the trust, which allows the person creating it—the grantor—to control the trust and the assets in it during their lifetime. When the grantor passes, the secondary trustee takes over, managing assets in the trust and distributing them according to the language in the trust.

A living trust isn’t for everyone. There are definite advantages. However, there are also some disadvantages you’ll want to understand before deciding if this is for you.

Living Trusts allow the grantor to maintain control of the trust and the assets within the trust. The grantor can change their mind about any aspect of the trust at any time. They can change beneficiaries, remove assets or even close the trust.

The Living Trust takes assets out of your probate estate, meaning the assets in the trust are distributed to beneficiaries with no court involvement. Probate is a lengthy, expensive and public process. It can take months or years to complete, and the will becomes part of the public record. Anyone who wants to, from nosy relatives to scammers, can read the will.

Those with significant wealth use trusts to keep their private business private. People with estranged family members use trusts to maintain privacy and prevent feuds.

However, there are some downsides to consider. There is some work and costs associated with trusts. Placing assets into a trust requires retitling those assets, such as real estate or investment accounts.

You should speak with an estate planning attorney, especially if your goal in creating a trust is to qualify for Medicaid. This is a different type of trust requiring the help of an experienced estate planning attorney.

A trust isn’t an instant tax shelter. An estate planning attorney should be consulted to create the proper legal entities if your main goal is to take assets out of your estate to avoid federal, state, or inheritance taxes.

Trusts aren’t do-it-yourself projects. To do this right, you’ll want the help of an experienced estate planning attorney. They’ll help you define your goals and then create a plan to achieve them.

Reference: The Motley Fool (July 5, 2024) “Is a Living Trust Really the Best Way to Pass an Inheritance to Your Family?”

How Does a Revocable Trust Work?

 

A revocable or living trust is a document created by you while you are living, creating a separate legal entity to hold title to property or receive property by being the designated beneficiary of financial assets. Real estate is moved into the trust by recording a deed for the real estate into your trust, according to the article “What are the pros and cons to putting my home in our trust” from Coastal Point.

There are many benefits to having property in a revocable trust, including probate avoidance, especially when you use one trust to hold property in more than one state, thereby avoiding having the estate go through probate in more than one state. Trusts are also used to make the administration of an estate easier and maintain property in further trust for beneficiaries within the initial trust. Trusts are also used to maintain privacy, since a revocable trust is never a public record in most states, unlike a last will and testament.

The revocable trust can be more expensive and time-consuming to set up initially. Nevertheless, they save the beneficiaries time and money after the death of the grantor (the person creating the trust). They can be a little more difficult for people to understand than the traditional last will and testament. However, the overall pros usually outweigh the negatives.

Probate is the process by which the court approves the validity of the will and the plan to distribute assets to beneficiaries. When someone dies, and their real estate and assets are not in a trust, the estate is probated, meaning an estate is opened at the Register of Wills in each state where the person owned real estate. The assets of the decedent are tied up for at least eight months, so any creditors of the decedent can submit claims against the estate. After the period of time required by each state, check with your estate planning attorney to find out about your state’s process. The estate can be closed, and assets can be distributed.

The main benefit of placing real estate in trust is to avoid probate. This not only saves time and expense but allows the property to pass immediately to the beneficiaries, be sold to a third party, or otherwise be disposed of following the instructions in the trust. Holding assets in trust also provides privacy and lets you be very specific about what you want to happen to those estates.

If the trust is revocable (as opposed to irrevocable), you also have a lot of flexibility. Changes can be made to the terms, contents and distributions as wished by the grantor. The trust can even be revoked entirely, if wished. A revocable trust remains private and is not part of the public record.

Be sure to fund the trust once it is created, either by retitling deeds or other asset ownerships. Knowing exactly how to title the property deed or make proper changes to account names is something your estate planning attorney can help with.

Reference: Coastal Point (Feb. 15, 2024) “What are the pros and cons to putting my home in our trust”

What Is the Purpose of a Living Trust?

 

There are so many misconceptions around trusts, especially thinking trusts are only for wealthy people, according to a recent article, “2 Key Benefits of Living Trusts” from Forbes. During your lifetime, a living trust is an extension of yourself. There are no tax benefits or tax liabilities until you die, when living trusts provide benefits compared to assets not held in trust.

What happens to different types of assets after death?

If you own assets with beneficiary designations, these will be passed to beneficiaries outside of probate. These are typically retirement accounts, life insurance, some investment accounts, pensions and annuities.

If you have joint ownership of assets, they will become the property of the surviving joint owner(s) after death. The most common jointly owned assets are real estate, bank and investment accounts.

If you own assets as an individual, they will go through probate. While bank and investment accounts do permit transfer-on-death (TOD) and payable-on-death (POD) elections to bypass probate, this is not appropriate for every situation.

Two of the most common benefits of having a living trust are avoiding probate or reducing the probate estate and having greater control over the distribution of assets.

If one spouse passes and owns all liquid funds (and/or a privately owned business) in their own name, the survivor may be left without funds to pay bills while the probate estate is being settled. Having a living will means the survivor, if named as a beneficiary of the trust, has access to assets during probate.

Probate also incurs expenses and can take months to settle an estate. Any assets going to through probate become part of the public record, which can create a host of other issues. A large estate in probate can become a burden on the surviving spouse and family.

When assets go through probate, the court has the final word on how assets are distributed. This may align with your will, but it might not. Suppose assets are held in a living trust. In that case, probate or at least reduce the number of assets going through probate and control the distribution of the assets without your personal financial information becoming part of the public record.

Your estate planning attorney can create a living trust, naming you as the trustee and a person to serve as a successor trustee. Your successor trustee will be responsible for distributing the assets in the trust upon your death.

There are many ways to create the trust. The spouse is typically the successor trustee, with varying levels of access to assets during the surviving partner’s lifetime, with the remainder going to children or relatives. Trust laws are state-specific, so speak with an experienced estate planning attorney to create a trust that suits your unique situation.

Reference: Forbes (Jan. 24, 2024) “2 Key Benefits of Living Trusts”

What to Do Before Naming a Family Member or Friend to Be a Trustee

Here’s an all-too-common scenario: a husband and father of adult children had created a living trust to protect assets and eventually direct the family’s wealth to heirs. During his lifetime, the man had served as the trustee. His wife became the trustee when he died, as explained in the article “Before Naming Trustees, Get Their Consent” from Next Avenue.

When the mother died, the trustee role was given to one of the adult children. The child was stunned because no one had ever told him about this responsibility.

Living trusts typically require trustees to work with estate planning attorneys and financial professionals to manage assets, distribute investment income to beneficiaries, oversee taxes, and sometimes, maintain or sell real property. This is not just for wealthy families. Families of modest means benefit from tax and estate planning aspects of trusts. They allow grantors (the person establishing the trust) to leave assets privately and, in some states, avoid probate, which is usually a public proceeding and can take time to complete.

Some heirs may not be happy with the person named to be the successor trustee. Some living trusts include special instructions for certain beneficiaries intended to control spending, if the grantor thinks the heir may be unable to manage their inheritance.

This can be avoided by having candid discussions with all family members about the parents’ future plans. Sometimes, having a family meeting at the estate planning attorney’s office—neutral territory and an expectation of mature behavior—may make the conversation less tumultuous.

The person named to be a successor trustee needs to be considered carefully. Just inserting someone’s name in the trust document without speaking to them first about the possibility of taking on the role and what it entails is a recipe for disaster.

Before the estate planning attorney completes trust documents, grantors need to think about who would do the best job, what relevant skills they have and who would be able to manage the family’s relationships if unpopular decisions need to be made.

If there are two adult children, the better choice isn’t necessarily the older of the two. The one with the greater financial acumen is the better candidate.

Suppose no suitable candidates from the family can be identified or no one is willing to take on the tasks. In that case, grantors may consider their estate planning attorney or a professional trustee from a financial firm. Although some grantors would prefer to have a family member as their successor trustee, this may not always be possible.

Once the candidate has been named and before the documents are completed, a meeting is needed to outline the trustee's responsibilities. Once the candidate fully understands what they must do and agrees to the role, the grantors might want to hold a family meeting to explain their choice and have an open, hopefully peaceful, discussion.

Reference: Next Avenue (December 22, 2023) “Before Naming Trustees, Get Their Consent”

Can I Prevent Children from Fighting over my Estate?

Even the best of sibling relationships can become strained after the death of a parent. This is especially true if the estate includes real estate, like a family or vacation home. More than one adult child often wishes to inherit the asset for sentimental and financial reasons, according to the recent article “Estate Planning: Reducing risk of family in-fighting” from Lake County News.

Sometimes, a family discussion between parents and children about the planned property division can reach an agreement, becoming part of the parent’s estate plan. However, there are times when this isn’t possible.

When the family is a late-in-life blended family, gaining consensus among the siblings may be more difficult, especially if the two sets of children were never close or never got along.

Some children may expect their biological parents to leave the assets brought into the second marriage to their biological children. Stepparents need to take steps to ensure that their separate property goes to their own children. Their stepchildren don’t have to approve of the gift. However, it is crucial for proper estate planning to be done in advance.

If the parent wishes to give each child an equal share of their inheritance and the inheritance includes real property, it may be best to use cash gifts to equalize their shares. The monetary gifts might be funded through life insurance proceeds or by having the successor trustee borrow against the real estate.

This may mean the child who inherits the real property will take it subject to the loan, which they will pay off, or refinance the debt upon distribution.

Families who own businesses require special consideration because some children may be actively involved while others are not. Succession planning will need to be done, including placing the business in a partnership or a corporation. The children involved in the business may be made general partners or executive officers in the corporation. In contrast, the children not involved in the business could be made passive partners or given ownership interests without an active participation role.

Suppose the estate includes valuable heirlooms or items with great sentimental value. Conversations about the individual items should occur while parents live. In that case, the wishes should be incorporated into the will.

If it seems as if the family can anticipate disputes over possessions or assets, an experienced estate planning attorney can prepare an estate plan designed to withstand challenges. This type of protection varies depending on the circumstances and the anticipated nature of the challenges.

One common scenario is a disgruntled child pressuring the parents to change their will to favor the child. If a no-contest clause is used, where anyone who disputes the will and loses the lawsuit will also lose what they would have otherwise inherited from the estate, other siblings may lose out entirely. Preparing a will for challenges requires a lot of strategy and planning .

In some states, it is possible to petition the court to confirm the terms of the trust while the grantor is living. This forces any contest to occur while the parent is still living and can testify to their intentions. In some high-value estates, this is a pre-emptive strategy to be considered.

Reference: Lake County News (Dec. 9, 2023) “Estate Planning: Reducing risk of family in-fighting”

 

What Is a Life Estate?

 

The person who holds the life estate, known as the life tenant. He or she is entitled to live in and use the properly as they see fit. However, they don’t have the right to sell or transfer the property to someone else.

Realty Biz News’ recent article entitled, “What is a Life Estate and How to Use It,” explains that a recorded deed will reference that a property is a life estate and name the life tenant. Once the life tenant passes away, the property passes to the remainderman—those who will inherit the property after the life estate ends. Let’s look at some of the reasons why someone might want to have a life estate:

Estate Planning. By transferring property into a life estate, the original owner can ensure that the property will pass to a designated beneficiary without probate. It can be particularly useful for people who want to avoid the time, expense and complexity or the probate process.

Asset Protection. The original owner can protect the property from creditors and other potential liabilities by transferring the property into a life estate. This is useful for those in high-risk professions or with significant debts or legal issues.

Family Dynamics. A life estate can also be used to address family dynamics and ensure that everyone is taken care of. For example, a parent might create a life estate to ensure that their adult child can live in the family home for the remainder of their life without giving them outright ownership of the property.

Tax Planning. By transferring property into a life estate, the original owner can reduce their taxable estate and potentially lower their estate tax liability. This can benefit individuals with large estates who want to minimize their heirs' tax burden.

When a life estate is created, the property is divided into two parts:
the life estate; and
the remainder interest.

The life tenant has the right to use and enjoy the property during their lifetime. The remainderman has the right to inherit the property after the life estate ends.

Remember, with a life estate; the ownership is broken down into possession and ownership. The life tenant has possession and ownership until they pass away; the remainderman has ownership only.

When the life tenant passes away, the property passes to the remainderman, who becomes the new owner. The remainderman has the right to sell, transfer, or otherwise dispose of the property as they see fit.

Reference: Realty Biz News (March 20, 2023) “What is a Life Estate and How to Use It”

Does the Way I Title My Assets Have an Impact on My Estate?

FedWeek’s recent article entitled “How Assets Are Titled Can Make a Big Difference” discusses the different ways property may be titled, and the significance of each one.

The way in which you take title to assets can affect your estate, taxes and perhaps the disposition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one, so the other spouse can take possession immediately without taxes or complications. Joint ownership may be the simplest way to meet most of these objectives. However, this can get complicated if any number of things happen, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types.

It’s critical to be educated on the different types of ownership, so you know when a change may be needed. Here are the main options:

Holding Assets in Your Own Name is simple and inexpensive. However, if you become incompetent, those assets might be mismanaged. At your death, individually owned assets may have to go through probate.

Joint Tenants with Right of Survivorship is when one co-owner dies, all assets held this way automatically pass to the survivor. One joint owner can take over if the other is incapacitated, and jointly held assets don’t go through probate.

Tenants in Common means there’s a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner doesn’t automatically own the entirety of assets.

Tenancy by the Entirety is a type of joint ownership similar to rights of survivorship for married couples. It lets spouses own property together as a single legal entity. Ownership can’t be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

With Entity Ownership, you might create a trust, a partnership (such as a family limited partnership), or a limited liability company (LLC) to hold assets. These entities may provide protection from creditors and tax benefits.

Community Property may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). Each person owns an undivided interest in the entire property. When a spouse dies, the survivor automatically receives the entire interest, so there’s no need for probate. Community property can’t be controlled by a person’s will or trust.

Ask an experienced estate planning attorney to review your estate plan and how assets are titled.
Reference: FedWeek (July 27, 2022) “How Assets Are Titled Can Make a Big Difference”

Handing Down the Family Home: A Potentially Dangerous Gesture

Giving the family home to your heirs early? Take great care! This is too important a gift to get wrong, and it’s too easy to do just that. This challenge was the subject of recent article in The Wall Street Journal titled the “Dangers of Giving Your Home to Your Children.” The family home is often the most important gift you could ever give to an adult child or your adult children. It is meaningful simply by right of being the family home and its place in the family history. When given to a young couple it is also a gift of the future, and a very practical one if you don’t need the space anymore or just wish to downsize. Nevertheless, houses are as complex as they are valuable when considered as assets and potential tax burdens. Giving the house away early means moving a taxable asset around, and doing so at different times and in different ways will bring different tax burdens. These issues include weighing the consequences of a lifetime gift versus as a testamentary bequest. In the end, you need to fit the house into your overall plan, and carefully at that. Then there is even more to the financial side and the darker side of liability. A house as an asset is a magnet for creditors, divorce proceedings, and all manners of scaly legal problems that make claim or foreclose upon the house under the name of a younger, less financially stable, adult child. Giving it to them to live in forever might end up risking it to creditors, and if you intend to stay living there that means putting you out too. And what about control? Not all family problems work themselves out, after all. It is now up to the kids to keep or sell the house, even against your wishes and, again, even to evict you right out onto the curb if you intend to still live there. So, do appreciate the house and the gift of it to your loved ones. At the same time, however, also appreciate it as a difficult transition fraught with potential issues to guard against. Once you appreciate the issues you can appreciate the solutions, and depending upon the house, your heirs, and your own needs there are many powerful solutions at your disposal.

Reference: The Wall Street Journal (April 13, 2014) “Dangers of Giving Your Home to Your Children”

For more information, see www.jerryreiflawyer.com

Estate Planning With A Life Estate

Do you want to avoid probate when it comes to the transfer of your assets at death, especially when it comes to your home? Perhaps you would prefer that home to pass directly into the hands of your adult heirs. If yes, then consider using a “life estate” approach. If the concept of a life estate is new to you, then a recent article in The Wall Street Journal ought to be on your reading list. As the article titled “An Easy Way for Heirs to Inherit Your Home” explains, a life estate for real estate operates like a “payable-on-death account” for a bank account. Here is how a life estate works. First, you draw up a deed to your house naming your heirs as beneficiaries. Second, you live in the house for the rest of your life. Third and lastly, after you pass, your named heirs need only to present your death certificate to assume title to the family home. This can save time and money often associated with probate. Simple? A life estate may be too simple, depending on the circumstances. As with most things legal, things can get complicated quickly. For example, you will not be free to sell your home during your lifetime without beneficiary consent and there are tax issues to consider. Depending upon the home and your objectives, there may be better ways to transfer the family home. Regardless, a life estate is a proven transfer tool just right for the right circumstances.

Reference: The Wall Street Journal (February 9, 2014) “An Easy Way for Heirs to Inherit Your Home”

For more information, see www.jerryreiflawyer.com

Coming Up To Speed on the Inheritance and Coming Out Ahead on the Market

Inheriting a property can be an immense gift and boon to your future. Even if it’s not going to be a home to live in and is just an asset to sell, what a windfall it can be. That said, inheriting a property also brings with it certain important responsibilities, and that goes double and triple for executors or trustees. There are all sorts of liabilities, insurances, and special transactions that might become important when a piece of real property is at stake. However, foremost at issue for heirs is selling it at the right value. Indeed, responsibility for understanding the real estate market or knowing whom to trust when selling real estate is something an heir takes on. A possible case of failure to get the value of an inheritance right was brought to light in a recent MarketWatch article titled “This NYC home’s price rose 54% in a week.” The New York City home in question was inherited and then privately sold. Thereafter, the buyer’s turned around and sold it again - and the market snapped it up at 154% of the sale price given to the heirs. Perhaps the heirs knew what was going on. On the other hand, perhaps this was a classic case of heirs accidentally lighting up a fire sale in their haste to get rid of an asset. While heirs themselves can lose such a windfall, woe be it to executors or trustees who do not do their due diligence and miss the mark on a profitable sale. If you are set to inherit a property, it’s a good idea to understand the responsibilities and the factors at play. You don’t need to become a real estate expert just yet, but it is a great idea to know what you’re dealing with. What if you are planning for your estate now? Do you know the value of the properties you might pass down, and is there something that can be done to teach your heirs about maximizing the value of the property?

Reference: MarketWatch (March 19, 2014) “This NYC home’s price rose 54% in a week”

For more information, see www.jerryreiflawyer.com

Home Is Where The “Estate” Is Saginaw, MI

Some assets are simply more important than others. In many families real estate is that asset, particularly the family home. How and when should real estate be passed through the family? This can be a very difficult question. Commonly, elderly parents do not want to leave the old family home. Nevertheless, there are some important financial and legal considerations to ensure the real estate “issue” is dealt with properly and at the right time. The New York Times recently provided some solid guidance for adult children (or other loved ones) in an article titled, “Mom and Dad, Let’s Talk Real Estate.” Given that the article originated in the Big Apple, the real estate in question is in the form of apartments. Your home may be an apartment in the Big Apple or a farm on the prairie. The value of your home may have gone up and up, or the value may have burst with the 2008 housing bubble. Regardless, the wise counsel offered in the article is transferrable wherever “home” is. Why? Because real estate decisions are as emotional as they are financial. Parents do not want to move from the old family home and the memories that live there. On the other hand, their children just want what is best for them and the family home itself. Sometimes, this means selling the family home or transferring it from one generation to the next. There is no one solution. However, there are more options available if you plan now, rather than react later.

Reference: The New York Times (June 28, 2013) “Mom and Dad, Let’s Talk Real Estate

For more information, see www.jerryreiflawyer.com

How to Pass On the Family Home

For many families, the family home is the single most important estate asset, imbued with all the memories, hopes and dreams that make it irreplaceable. Family homes also may be the most valuable estate assets, and estate taxes may complicate plans for passing them along to the next generation. If this is your goal, however, don't give up. There are tax-savvy strategies to make it happen, but they require you to plan ahead. For a good overview of this topic, turn to a recent article in SmartMoney, “Passing Your Home to Heirs.” The article is pretty easy reading on a fairly complex subject, and includes a run-down on some effective strategies: from the simple bequest in your will, to variously structured sales, to more sophisticated trust-based strategies. Which planning strategy will work best for you depends upon your unique circumstances. This definitely is not a do-it-yourself undertaking. There are many factors to be considered and legal land mines to avoid. If passing a family home to your heirs is one of your goals, be sure to discuss this with your estate planning attorney, who can guide you to implement a strategy that will work for you.

Reference: SmartMoney (February 5, 2013) “Passing Your Home to Heirs”

For more information, see www.jerryreiflawyer.com

 

Giving Real Estate to Charity? (Remember the Appraisal!)

When it comes to charitable giving success, you must dot all the i’s and cross all the t’s. Remember, with the IRS and the tax court, the devil truly is in the details. This was the lesson Joseph Mohamed, Sr., a generous (and wealthy) real estate developer, recently learned. Rueters recently reported on his case in an article titled “A harsh lesson on charitable contributions.” It seems Mr. Mohamed had more than the requisite charitable intent but failed to follow the strict rules required to claim the deduction for his generous contribution of real estate worth in excess of $18.5 million. The problem? If you make a charitable contribution in the form of real property worth more than $5,000, then the real estate must be properly appraised and the appraisal must accompany the donation form. Unfortunately, Mr. Mohamed (who, ironically, is a certified appraiser) failed to follow this fundamental requirement. Even though the tax court conceded that the real estate in question likely was worth at least $18.5 million, the deduction was not granted.

Reference: Reuters (June 1, 2012) “A harsh lesson on charitable contributions”

Using Easements to Preserve Posterity Property

Sometimes one of the greatest charitable gifts you can bestow is the mere promise not to do anything with, or to, what you own. Of course, this common conundrum occurs most frequently when you happen to be sitting on a piece of history. Whether the property is in the country or in the city, the challenge is the same: how to protect the property from development in perpetuity. Sometimes, however, the key is convincing the IRS of the charitable value of the property itself. If you have an asset worth this kind of consideration, and the hope to preserve it, then an “easement” may be necessary. In the city there are “façade” easements, and in the country there are “conservation” easements. Both are worthwhile means to a charitable end. Consider Peter Reilly’s recent post in Forbes, titled “Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers,” about an illustrative case in TriBeCa, Manhattan. The story highlights some possible, practical complications that may arise when the situation seems too good to be true. After all, an easement is a unique way of giving to charity and your neighborhood, but only when the IRS agrees. A practical concern, if successful in obtaining the easement with IRS approval, is in finding a charity to enforce your charitable gift and the easement of your property. Ultimately, the end result may be worth the work if you preserve your posterity property in perpetuity from development in the hands of an inevitable McDonalds or Starbucks franchisee. The charitable tax deduction can come in handy, to boot.

Reference: Forbes (May 7, 2012 “Donating TriBeCa Facade Easement Is Like Renouncing Your Super Powers

ESTATE PLANNING / GIFTING REAL ESTATE

New tax rules make big gifts to family members popular this year. If you made a gift of real estate (or are considering making one) be warned – the IRS is scrutinizing land-transfer records looking for folks who may have made a reporting error. As The Wall Street Journal reports, the IRS has begun requesting state land-transfer records and checking them against reports of the past few years to find if there are any discrepancies. Congress raised the limit on how much a person can give in a lifetime to $5 million without having to pay gift tax. Still, any time you give one person a gift of more than $13,000, you are supposed to let the IRS know by filing a Form 709. Land transfers can easily exceed the $13,000 limit, which could explain why the IRS is so interested in examining them. States that have already handed over information on gift-like transactions include Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington and Wisconsin, generating several hundred cases for review, with 12 cases resulting in taxes or penalties. In fact, according to IRS documents, the failure-to-report rate is “extremely high.” Taxpayers need to be aware that there is no special exception to the rules when making a transfer to a family member. If the property is valued at more than $13,000, a gift-tax return must be filed. Even if the transfer falls within the lifetime exemption amount – currently $5 million – it must be reported. You can learn more about gift and generation-skipping-transfer taxes in the Estate Tax Practice Center on our website. You can even use our handy Estate Tax Calculator to estimate your future estate tax liability.

 

ESTATE PLANNING / REAL ESTATE GIFTING

The economy is starting to show some life in a number of sectors but, unfortunately for many, the housing market is not one of them. The good news for the crafty estate planner is that the poor housing market coupled with the tax laws that went into effect with last December’s compromise offer a rather unique opportunity, one that may very well rate amongst the smartest estate planning moves one will ever make, according to Forbes columnist Rob Clarfeld. Now might be time to give away the house. The poor housing market remains perhaps the largest unhealed wound of the Great Recession. If you are trying to sell a home right now you are likely a bit frustrated. Homes are not moving quickly, and many sellers are forced to take a relative loss just to move their property. But, if you were considering making a gift of your home, the situation is entirely more cheerful. Depressed prices mean that you won’t have to work to reduce your home’s taxable value, and the gift you make of it will take a much smaller chunk of your lifetime gift tax exemption. This is a serious boon to high net-worth individuals looking to give away property of considerable value. But wait, there’s more. The tax compromise signed in with the budget deal last December also extends the lifetime gift allowance from $1 million up to a generous $5 million. So, right now, there is an 18-month window of opportunity for you to make a tax-advantaged gift. Previously, when one wanted to give away real estate the strategy of choice might have been a Qualified Personal Residence Trust (QPRT) because it allowed for considerable discounts given certain risks through a gradual transfer, but with this perfect storm of depressed real estate prices and a generous gift tax exemption – an outright gift in trust may make more sense. Further, if you want to retain post-gift use of the real estate, you may want to consider transferring the home to an Intentionally Defective Grantor Trust (IDGT), with a structured plan that allows you to remove the asset (in this case your home) from your estate for estate and gift tax purposes, but not for income tax purposes. . Of course, carefully crafting the trust provisions, including dispositive and potential generation skipping provisions, is of utmost importance. Again, this window of opportunity could close at any time, so if this is an estate planning strategy you might consider, you are well-advised to discuss your situation with professional counsel sooner rather than later.

 Reference: Forbes (June 22, 2011) “Your Smartest Estate Planning Move Ever: Give Away Your House—Now!”