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Timing Sale of an Asset Late in Life

Q: My husband and I own a lot for which we paid $25,000 decades ago. It is now worth about $750,000. We are retired; I am 61 years old and he is 71. We are financially comfortable. I want to sell the lot, pay the huge tax bill and invest the remainder. My husband wants to hold on to it. He says that upon the death of one of us, the survivor would get an immediate step up in value and could sell the lot without suffering the huge tax bite. What should we do? -- M.N.H .

A: Since there is no need for immediate income, the key to making the right decision, our experts say, is determining the intersection of two all-important factors: the rate of expected appreciation of the property and your life expectancies.

A:ccording to actuarial tables, a 71-year-old male has an average life expectancy of 12.7 years and a 61-year-old female can expect to live another 19 years.

Let’s assume your property is appreciating at the rate of 3% a year. Now let’s try to see where the two factors intersect. Appreciating at 3% a year for the next 13 years, the property would be worth about $1.1 million at your husband’s theoretical death. At this point, you could sell the property and pocket the proceeds without paying taxes on the accumulated appreciation.

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If, however, you sell the property now, you would be subject to a combined tax rate of 35% on your $725,000 profit, for a tax bite of nearly $254,000. You would have less than $500,000 left to invest. If you could invest it at 6% tax-free, you would have a nest egg of slightly less than $1.1 million at the end of 13 years--about what you would have if you were to sell it in 13 years as a widow.

Now that you know what the process is, you can start substituting different--and perhaps more realistic--investment return and property-appreciation assumptions into the formula. Perhaps a 3%-a-year appreciation rate is too high. Perhaps you cannot get a 6% tax-free return on an investment. Perhaps one of you is in poor health. These are the factors you have to consider when evaluating how to proceed.

Figuring the Tax Basis for an Inherited Bond

Q: My wife inherited a Savings Bond from her grandmother that is now worth about $1,100. What is my wife’s tax basis in the bond? -- D.W.

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A: Her tax basis is the original purchase price of the bond paid by her grandmother. Like annuities and installment sale notes, appreciated Savings Bonds are what are known as “income in respect to a decedent”; none are treated to a step up in value to the date of death of the donor, and heirs inherit the original tax basis.

However, it may be possible for the bond’s appreciation to be declared as taxable income on the final tax return of your wife’s grandmother. If her grandmother had little or no income during her final year--perhaps because she died early in the year--the tax would be minimal or nothing at all. In that case, the tax basis of the bond would be reset as of your wife’s getting it. Whoever is filing the grandmother’s final tax return should be able to assist you.

Review Revocable Living Trusts Every 5 Years

Q: I have a revocable living trust that is dated October, 1991. Will I have to review the trust at any particular time to keep it active? S.P .

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A: Unless there are major changes in the estate tax law, your own life situation or that of your beneficiaries or trustees, you should review your trust about every five years.

Why even bother with a review? Because, the experts say, there could be minor tax code changes of which you are unaware. Further, this review should serve as a reminder that any assets you acquire after creating the trust should be put in the trust’s name if you want them to be included in that portion of your estate. (You should be doing this all along, but in case you forget, the review should check into this.) Finally, your attorney or financial adviser isn’t likely to charge you much more than $100 or $200 for a routine review--money well spent if it spots any problems.

Spouse’s Social Security Benefits After Divorce

Q: I am a divorced woman in my late 60s and was married for more than 20 years. The divorce was final years ago. Am I entitled to any Social Security benefits on my ex-husband’s account? -- R.S.G .

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A: A divorced woman is entitled to receive Social Security benefits accumulated by her ex-husband if they had been married for at least 10 years and he is already drawing benefits. However, if he is still working, she may draw benefits if the couple has been divorced for at least two years and the wage earner is at least 62. Husbands may collect on their former wives’ benefits under the same rules.

If your ex-spouse is alive, you may start collecting benefits at age 62. However, your monthly benefits will be just 37.5% of the wage earner’s benefits. If you wait until age 65 to claim benefits, the payment is 50% of the wage earner’s benefits.

If your former spouse is dead, you may start collecting benefits at age 60. However, your monthly payments will be just 71.5% of what the wage earner was entitled to receive.

The percentage increases until reaching the full 100% if the ex-spouse waits until age 65 to begin receiving benefits. If the deceased had started collecting benefits at age 62, the amount the former spouse is entitled to receive is pegged to the amount the recipient had been getting at the time of death.

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If you are disabled, you may start collecting at age 50 if your former spouse is dead. If the ex-spouse is alive, 62 is the minimum age at which a disabled spouse may start collecting benefits.


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