Sidestep Probate With a Revocable Living Trust
Q: I own a house that my deceased husband and I purchased in 1953 for less than $19,000. The deed is in my name alone, but I would like to add the names of my two children. I was told that if they were listed as joint tenants, my house could be attached if either child were held liable for an accident and the value of the house were needed to cover their obligations. Is there some way to list them on the deed without such problems? I want the house to go to them upon my death as simply as possible. -- D.D.I
A: Many senior citizens are under the mistaken impression that listing their heirs on the titles to their property is the best solution to all their apprehensions about probate and inheritance. Actually, you may be far better off keeping title to your house as it is and pursuing another course.
What are your choices? The hands-down favorite among many financial planners and attorneys for those in your circumstances is the revocable living trust. Simply speaking, these arrangements allow taxpayers to place their assets in trust for their heirs. Upon the trust holder’s death, the assets are passed on to the heirs without the often costly and time-consuming probate process.
One of the most significant benefits of these trusts is that they give the assets placed in them a “stepped-up” value as of the date of the trust holder’s death. For example, if your house is worth $300,000 when you die, that is the tax basis value assigned to it when it passes to your heirs. Should they sell the property later for $350,000, tax would be assessed on the $50,000 difference. If you had simply added your two children to the deed, their one-third shares of the home would have a tax basis calculated from the home’s original price. If the home cost $60,000, their basis would be $20,000 each. Quite a difference from the “stepped-up” value available through the trust.
Another popular feature of the revocable living trust is its provision that allows you to name your heirs as co-trustees of your trust, which would allow them to manage your assets for your benefit should you become incapacitated.
This is only a quick outline of the advantages offered by these trusts. As you probably can guess, such trusts are not cheap. You can probably expect to pay your lawyer at least $1,000 for a relatively simple--but complete--trust agreement. You are well advised to consult your family attorney, accountant or financial planner. You may also want to read more about these trusts in one of the many estate planning books available in libraries and bookstores.
No IRS Break on Home-Sale Rule
Q: I recently sold my home in California and entered medical school in Chicago. I had a $100,000 gain on the sale and will use these proceeds to finance my education and internship. I will be unable to buy another house for at least five years. Is there any way I can get around the IRS law requiring you to re-invest home sale profits within two years or pay taxes on them? I feel I have special circumstances and should be given a waiver. --M.D.B.B.
A: Sorry, the IRS does not grant waivers to the two-year tax deferral. You must either buy a home of equal or greater value than the one you sold within two years of the sale, or pay income taxes on your profit. No exceptions.
How to Check on Annuity Issuers
Q: I am thinking about buying an annuity and know I should check out the company issuing it quite carefully. How do I do that? --H.H.C .
A: There are several sources for information about annuities and the life insurance companies issuing them. Perhaps the best known rating service is A. M. Best, which regularly publishes its own insurance company ratings. Similar evaluations are also published by Standard & Poor’s, Moody’s and Dunn & Phelps. These publications are often carried in public libraries. Your stock broker no doubt has them as well.
Your financial planner, stock brokerage, banker and life insurance salesman--your most likely source for buying an annuity--should be able to provide the information you need to make a wise selection. Your job, however, is to be sure that you receive the impartial analysis that you need to evaluate your potential purchase. If you want to know the A. M. Best rating and evaluation of the life insurance company issuing the annuity, don’t buy the annuity until you receive the report. But beware; much of the information in Best reports and other ratings is often months old, and subsequent events in today’s fast-moving financial world may have undermined the safety of an institution and its investments.
Figuring Income Tax on Old Split Shares
Q: In 1914, my wife’s grandfather gave her three shares of stock then valued at $3 each. Over the years, the stock split three times, and by the time we sold it earlier this year, we had 24 shares valued at $71.50 each. We received $1,716 from the sale and are trying to figure out how much tax we owe. What is our taxable basis in the shares? Is it $3 per share for each of the 24 shares for a total of $72, or the value on the days the shares split, or is it just a tax-free gift? --K.C.K.
A: Our tax experts say your basis is the price the donor paid. We will assume that your wife’s grandfather paid $3 per share. That puts your taxable basis in the stock at a total of $9--three shares at $3 each--and your taxable gain at $1,707, minus your selling costs.
