Strategy for Giving Away the House
Q: My husband and I own a home valued at about $800,000 in which we plan to live as long as we can. We have two daughters and enough of an estate so we can leave the home to one and an inheritance of equal value to the other. What can we do now to start turning over the house to the one daughter? Should we make her a gift of a share worth $20,000 each year?--
M.M.H .
A. By each year giving your daughter an interest in your home worth $20,000 (the $10,000 each person is allowed to give another tax-free annually), you are going a long way toward reducing the value of your estate and its potential tax obligations.
But perhaps, suggests Kenneth Kossoff of the Beverly Hills law firm Schneider, Goldberg, Rohatiner & Yuen, you might want to consider establishing a qualified personal residence trust.
Essentially, such an arrangement allows you to place your home in trust at its current value, live there for a length of time of your choosing and give it to your heirs at the end of the period. The value of the gift is reduced by the amount assigned to your right to continue living there and your right to give away the home by will if you die before the trust period ends. The actual value of these two reductions is established by statistical tables published by the IRS.
Be warned, however, that one pitfall of this trust is the fact that if you die before the term of the trust expires, the home once again becomes part of your taxable estate.
Consult an attorney or other qualified expert for additional estate planning advice.
Investment Club: Start Your Own
Q. I am interested in joining an investment club in the Glendale, Burbank or La Canada Flintridge areas. Is there someone I can contact about such a club?
D.H.
A. The National Assn. of Investors Corp., the group that helps individuals form investing clubs, recommends that you and other investors form their own groups rather than try to join an existing group. Why? It is often difficult to reapportion membership shares when a new member joins.
However, the association can still be of some help. The group’s Southern California Regional Council offers seminars on club operations. Call (310) 326-8150. Leave a message and a representative will get back to you. For free information about how to form your own club, write the association at P.O. Box 220, Royal Oak, MI 48068 or call (810) 583-6242, Ext. 22.
Retirement Savings Plans Are Distinct
Q. I am a psychologist in private practice and have both an individual retirement account and a Keogh account. My IRA is actually a SEP-IRA, something my broker said could be included in my Keogh. Later my accountant said the broker’s advice was wrong. The matter is important now because I would like to transfer my SEP-IRA into a new Keogh. May I do this?-- J.P.G .
A. You may not transfer your SEP-IRA into your Keogh. Keogh and IRA accounts are types of retirement savings plans and are treated differently by the IRS.
A SEP-IRA is an individual retirement account for self-employed taxpayers or businesses, typically small businesses. Its initials stand for “simplified employee pension.” Keogh plans are another type of retirement savings account for the self-employed.
The two plans differ in when they may be opened. Keogh plans must be opened before the end of the taxable year (or fiscal year, in the case of businesses); a SEP-IRA may be opened before the due date of the tax return, including any extensions.
For more information about Keogh plans, consult IRS Publications 535 and 560. For more information about SEP-IRA plans, consult IRS Publications 535, 560 and 590.
Stock Options Viewed Two Ways by the IRS
Q. I was given options to purchase the stock of my employer several years ago at a substantial preference. I exercised the options a few years later, making a rather handsome profit. I had assumed my profits would be treated as a capital gain. But when I received my proceeds, they had been treated as ordinary income and subject to withholding taxes as well Social Security taxes. Did my employer handle this correctly?-- D.J.B .
A. There is a great deal of confusion surrounding stock options because they can be purchased on the open market by ordinary investors and granted preferentially to employees by their companies as a form of compensation. Although both are called stock options, the Internal Revenue Service treats them quite differently.
Stock options purchased on the open market by investors are governed by the rules for investment income. They are not subject to Social Security or Medicare taxes, and income tax withholding is not absolutely required.
However, stock options granted as part of an employee’s compensation, sometimes known as “non-statutory stock options,” are usually treated as ordinary wages when the options are exercised. This means they are subject to withholding taxes and Social Security and Medicare deductions.
See IRS Publication 525, “Taxable and Non-Taxable Income,” and IRS Publication 550, “Investment Income and Expenses.”
Carla Lazzareschi will respond in this column to financial questions of general interest. Do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
