They want to give the caretaker the house she lives in without imposing a tax burden
Dear Liz: Our family owns a vacation home. A caretaker for the property lives in a smaller house next door that is also owned by our family. We consider her part of our extended family and would like to show our appreciation when the property is sold. Our wish would be to give the smaller house in which she lives to her as a gift, but we know the annual payment of property taxes would probably be too great a financial burden for her to live there as a retiree. (She is currently in her 50s.) Is there some sort of trust or fund we could set up that would cover her property taxes until her death without adding to her taxable income?
Answer: Yes, but there may be a better solution.
A trust can be set up to pay the property taxes or other property expenses during the caretaker’s lifetime, said Jennifer Sawday, an estate planning attorney in Long Beach. Trusts face high tax rates, however, and cost money to set up and administer. Plus, you have to find people willing to be trustees and backup trustees who are likely to outlive the caretaker. You also must decide what happens to the money when the caretaker passes away.
All these issues are surmountable, of course. Younger members of your family could be trustees, for example, or you could hire professional trustees. The money could be invested conservatively, or in tax-efficient mutual funds, to minimize taxes. Or it could be invested aggressively enough to pay the tax bill and still provide enough income to pay the property expenses.
Another, simpler solution would be to give her the cash outright. Gifts are not taxable to the receiver, so the gift itself would not increase her income taxes. She would have the burden of managing the cash, of course. Like the trust, she could invest to minimize taxes or more aggressively to potentially grow the money and offset inflation. Either way, her tax rates probably would be lower than the trust’s.
An estate planning attorney can help your family discuss the various options and set up the documents to carry out your wishes.
Unloading collections while you’re still alive
Dear Liz: You recently advised someone who didn’t know whom to select to administer a living trust because the person has no spouse, children or other living relatives. This person mentioned they had collectibles. An additional thing they should consider doing is donating the collection while alive to an archive, museum or other appropriate organization that would be interested in receiving it or in selling the items to support their mission. That way they won’t end up in the trash but will be handled appropriately. There also might be a tax advantage to this donation.
Answer: That’s an excellent suggestion. Here’s another good one:
Dear Liz: Selling off collectibles is a long, time-consuming undertaking. My husband was a huge collector and we did not want to leave that burden to our son. So when he retired, he started selling things on EBay. It was a lot of work and took him years. (We checked with our son to make sure he didn’t want the things he sold.)
Although all-purpose sales sites like Craigslist and EBay can be good, niche sites can often sell specific types of items faster and with less hassle.
Answer: What an excellent retirement project as well as a huge gift to your son. The first step is being willing to part with a collection while alive. Those who are ready to do so may be in a better position to find eager buyers than anyone who inherits the collection.
Collectors who don’t have the time or energy for this process can consider hiring someone to do it. Other alternatives include selling to a dealer, either outright or through consignment, or hiring an auction house, if the collection is valuable enough to attract bidders’ interest.
Rent-or-buy question isn’t simple
Dear Liz: I often agree with your advice, but recently you suggested a 70-year-old widow rent rather than buy. I say buy the condo with the stairs and reap the appreciation. Later, if you need a home without stairs, sell the condo and buy another with your profit. I’m 73, and buying rather than renting has allowed me to live payment-free while leaving some future equity for my heirs.
Answer: In a follow-up email, the reader told me she had already purchased the condo and just wanted confirmation she’d done the right thing. A bigger issue than the stairs is her lack of savings and the possibility she would become house rich and cash poor. Fortunately, though, the condo is new and she’s not likely to face large special assessments for repairs, which would be an issue for an older building.
Death doesn’t take a holiday
Dear Liz: In a recent response, you wrote, “Your living trust should name a successor trustee who can take over managing your affairs if you should become incapacitated or die.” This sort of writing is not uncommon but it implies some people won’t die. It would have been better to write "... take over managing your affairs when you die or if you should become incapacitated.” This is important, since it is noteworthy how many people are unwilling to face the facts when it comes to being prepared and finances: None of us are going to get out of this alive.
Answer: Good point!
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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