Category: Practice Areas

San Diego Real Estate Law Firm

What to Do With a Residence Upon Death

Dear Sophos

 I am acting as Trustee for my dear dead Aunt Betsy.  One of the Trust assets is her California residence.  What are some of my fiduciary duties and what should I be doing with the house?

 Little Johnny

 

Dear Little Johnny:

First, as Trustee, you have a general duty to secure the residence and to preserve its value.

Assuming that the house is not passing to a specific beneficiary, after the initial 120 Notice period, you should consider liquidating, selling, the house.

During the initial 120-day period of administration, I suggest that, at a minimum, you do the following:

  • Make a detailed inventory of the house content, by photos or video, remove and secure any personal property of substantial value and empty the refrigerator;
  • Have a Locksmith change all of the locks and give you the keys;
  • Have all mail forwarded to your address and stop any newspaper delivery
  • Install an inexpensive security system that will automatically contact the security company if there is a break-in;
  • Have the yard regularly maintained, as though someone was living in the residence;
  • Talk to the neighbors and leave your telephone number with them in the event of an emergency;
  • Install a timer on several lamps, set to go on and off at different times;
  • Find the homeowner’s insurance policy and contact the insurance agent to be certain that the coverage is adequate;
  • If appropriate, have a plumber “winterize” the house;
  • Timely pay the monthly utility bills and loan payment as well as any homeowner’s association fees or at least contact the vendors to explain the circumstance.
  • Obtain legal advice from an attorney experienced in the area of trust administration.

I hope that you find this advice helpful and good luck in your capacity as Trustee.

The Sophos

Author(s)

San Diego Tax Law Firm

What to Expect from an IRS Audit

What every taxpayer should know regarding types of IRS audits and common issues that can trigger audit.

An audit is an investigation into a tax return of an individual, business, estate or trust.  The IRS uses this process to determine if the information provided in the tax return is correct. This article discusses three types of audits and several common audit triggers.

Types of IRS Audits

Correspondence Audit

This is the most common type of audit and also the easiest in terms of what is required and the length of time involved.  Usually the IRS will send a request for supporting documentation to prove deductions, exemptions, proof of dependents, proof of charitable donations or other documentation to corroborate a specific part of the return.  This is the least stressful form of audit for the taxpayer and usually sending in the requested paperwork is enough to satisfy the IRS.   It is strongly advised that you seek the help of an experienced tax attorney to prepare your reply to the IRS correspondence audit and to ensure the documentation you send is exactly what is needed.  As long as a response is made within the timeframe and the documentation enclosed satisfies the proof needed by the IRS, the audit is complete.  This type of audit is most commonly utilized for individual tax returns, where there are perhaps one or two simple issues the IRS wants you to substantiate.

 Office Audit

An invitation to appear at an IRS office to conduct an office audit is a serious matter.  It is important you do not attend the office audit without your tax attorney.  Being asked to an office audit means the IRS is counting on the possibility that you owe additional taxes.  It is essential that you seek the advice of an experienced tax attorney to accompany you to the IRS office audit to protect your rights and to use their knowledge and experience to assist you in finding ways to reduce or eliminate any additional taxes.

Field Audit

A field audit is the most serious form of audit and involves an IRS Auditor coming to your place of business to thoroughly audit your records.  If the IRS finds that your business has inaccurately reported income and evaded paying the correct tax, the consequences could result in heavy penalties, additional taxes and possible prison time.  It is of utmost importance to engage the services of an experienced tax attorney to be present while the IRS auditor is at your place of business.

Below is a summary of common audit triggers

Large amount of charitable donations

The IRS looks closely at the receipts and proof of your charitable donations.  If your charitable donations are more than 3% of your income, the IRS will scrutinize your documentation.  Make sure you have receipts, cancelled checks, and appraisals for all donations to substantiate your claim for deductions.

Failing to report part of your income

The IRS already knows what is on your W-2 and 1099s in terms of income.  If you do not report your income accurately on your tax return, this will likely trigger an audit.  You will receive a W-2 from your full-time job, but may also receive 1099s for freelance work you do on the side, as well as other forms of miscellaneous income, in all cases you must report all of your income from all sources.

Large losses on Schedule C, or many years of losses on Schedule C

If you are self-employed, and report your income on a Schedule C, you will report either a profit or a loss.  If your return shows a very large business loss on a Schedule C, or if you have a history of several years of losses on your Schedule C, this will likely attract IRS attention.

The reason behind this is that the IRS likes to see a profit at least two out of five years to consider a business legitimate.  If there are five years of losses reported on a Schedule C, the IRS will likely audit to see if ‘hobby’ would be a better description.  This is important because taxpayers are required to report any income earned from a hobby, but tax payers generally cannot deduct losses.

For example, a Professional Photographer with his own business, clients, advertisements, portfolio etc., can claim as a business expense the purchase of a camera.  Whereas, a doctor who enjoys taking photographs during his weekend hikes cannot claim a new camera as a business expense.

Claiming too many business expenses

In addition to the business/hobby issue just discussed, reporting too many losses can also cause the IRS to question how your business is staying solvent.  If you report many personal expenses through your business without it being a true necessary business expense (in order for your net profit to decrease and therefore your tax liability to decrease) the IRS will scrutinize your records during an audit.

Random Selection

Unfortunately, even if you do everything right, there is always a small (less than 1%) chance that your return will be randomly selected for an audit.

In Conclusion

If you do receive an audit notice from the IRS, it does not need to be the start of a stressful and difficult time for you and your family, or your business.  You will likely benefit from an experienced tax attorney’s advice and direction with the protection of the attorney client privilege.

Author(s)

San Diego Real Estate Law Firm

To Buy or Not to Buy – Unwrapping Title Insurance

Title insurance is one of the great mysteries when buying or selling real property.

In California, rarely does someone purchase residential real property without title insurance included.  Almost as rarely does the Buyer know why title insurance is being purchased and what coverage the insurance provides.

Basic title insurance questions include: do I need title insurance; who pays the premium; and what does the insurance do for me?

The answer to the first two questions are simple . . . yes, Buyers in California need title insurance to be certain that they are buying property with marketable title and, generally, the Seller pays the premium for the Buyer’s title policy through escrow, based upon the selling price, and the Buyer pays the premium for Buyer’s lender’s title policy based upon the amount borrowed by the Buyer to purchase the property.

The simple answer to what does it do for you, is that Title insurance protects against losses due to defects in title.

But that answer is misleading because in California there are three different insurance coverage levels, depending on the type of residential title insurance policy that is purchased.

Based upon this chart, provided by Fidelity National Title chart, the best title insurance choice for a Buyer is the ALTA Homeowner’s Policy, as it provides the broadest coverage.

 

Coverage Item

CLTA Standard Coverage

ALTA Residential (Plain Language)

ALTA Homeowner’s Policy

Post Policy Forgery Protection

No

No

Yes

Enhanced Access Coverage

No

No

Yes

Building Permit Violations

No

No

Yes

Subdivision Map Act Coverage

No

No

Yes

Restrictive Covenant Violations

No

No

Yes

Mineral Extraction Coverage

No

No

Yes

Map Inconsistencies Coverage

No

No

Yes

Coverage Extended to Living Trusts

No

No

Yes

Enhanced Encroachment Coverage

No

No

Yes

Automatic Inflation Protection (5 years)

No

No

Yes

Helpful online article on Title Insurance

I recently came across this article which includes an example of why every Buyer should insist on and obtain an ALTA Homeowner’s Title insurance policy when purchasing residential real property.

Click here to read this article.

Author(s)

San Diego Tax Law Firm

Tax Season is Here – The Advantages of Hiring a Professional Tax Preparer

The Advantages of Hiring a Professional Tax Preparer

Even the words ‘Tax Season’ can be enough to give anyone a headache!  Fortunately, you do not need to face tax season alone.  Hiring a tax professional can be invaluable to you especially if your situation has recently changed or is complex.

Federal tax law is adjusted every year, making it difficult for an average taxpayer to keep up to date with all the changes, and to understand how to apply these changes to their own tax situation.

A professional tax preparer works hard to keep up to date with all adjustments to tax law, both federal and state, making it advantageous to the taxpayer to hire someone with such an accurate knowledge base.

Deductions and Credits

With extensive knowledge and experience, a professional tax preparer will be able to assist you in finding little known deductions or credits, that you may be unaware you qualify for.

Where you may be eligible for several deductions and/or credits, and yet only be allowed to use one, your tax preparer will have the knowledge to accurately calculate which deduction and/or credit would be the best choice to minimize your tax liability.

IRS Audit

Facing an IRS audit alone can be tremendously difficult and stressful.  If you are audited, it might be tempting to answer the IRS yourself. It is strongly recommended that even the initial response to an IRS audit inquiry come from a tax attorney.

You can communicate confidentially with a tax attorney before the response to the IRS is prepared to give you the best chance of a “no change” letter from the IRS at the conclusion of the audit.

Filing Status

Did you get married or divorced in the past year?  Did you have a child?  Adopt?  Or have you recently lost your spouse?  These changes in situation can dramatically change your filing status and exemptions, deductions and credits you may be entitled to.

If you are a widow(er) your status may change not only for the year in which you lost your spouse, but for a specific time period after.  Determining the best and most tax advantageous filing status takes special knowledge of tax law and time-sensitive dates.

Your professional tax preparer would be able to determine the best way forward.

Child in College?

Is your child in college?  Your tax preparer can assist you in determining how to claim your child under the age of 24, if they are still in full-time education.

Determining how to properly claim older children, especially if they have income either in the form of wages or investment income, requires in-depth knowledge of ever-changing tax law.

Real Estate

If you have bought or sold any real estate, or have invested in rental property, a tax professional can assist you to make the most of the credits and interest deductions available to you.

If your home or property has been affected by a fire, flood, earthquake or other natural disaster, your tax preparer can assist you to take advantage of relief provisions and elections with regard to replacement property and any gain or loss incurred.

Starting a New Business

Starting a new business is an exciting time for anyone, however there are tax implications that can be difficult to understand.  A tax preparer will help you navigate the complex world of business deductions, expenses, insurances, how to properly report your income, accurately calculate self-employment tax and paying estimated taxes.

If you have started a new business, large or small, it would be wise to seek professional tax advice and assistance in preparing your taxes to ensure accuracy and to take advantage of your tax preparer’s knowledge to utilize all allowable deductions and credits to minimize your tax liability.

Summary

Indeed, hiring a Professional Tax Preparer to prepare and file your taxes, will ease the stress and burden of tax season, and leave you with peace of mind and confidence in your financial future.

Author(s)

San Diego Estate Tax Law

A Look at History:  The Estate Tax Exemption Really Has Increased

In a post earlier this year, we discussed that Americans can now transfer more than $5 million dollars in assets through the estate tax system without incurring a tax, while at the same time permitting their beneficiaries to receive those assets with a new and usually higher “stepped-up” basis.

Addressing the concept gave rise to the question:  Given inflation over the years, is the estate tax exemption really higher than it has been historically?  In order to answer that, we created a table showing the estate tax exemption over time, comparing it to the current buying power of the exemption amount in 2015 dollars.

While the comparisons are not perfect because the tax laws have changed over the years, the chart illustrates that the current exemptions are, indeed, historically high.

Throughout most of the twentieth century, the buying power of the exemption amount hovered at around $500,000 measured in 2015 dollars. The exemption’s 2015 equivalent started creeping up in 1990, but did not reach the $5,000,000 range until 2011. (The basic outline of the gift and estate tax laws has been consistent since the early 1980s.)

As noted in the earlier post, the exemption amount has been historically-high for several years.  There are no signs that it will be reduced in the near future.  It is clearly time to consider free basis when making estate planning decisions.

Tax Year                               Estate Tax Exemption                          2015 Equivalent

1920                                          $50,000                                                     $585,805

1930                                          $100,000                                                  $1,406,000

1940                                          $40,000                                                     $562,000

1950                                          $60,000                                                     $584,000

1960                                          $60,000                                                     $476,000

1970                                          $60,000                                                     $363,000

1980                                          $161,000                                                  $459,000

1990                                          $600,000                                                $1,078,000

2000                                          $675,000                                                  $920,000

2001                                          $675,000                                                  $895,000

2002                                          $1,000,000                                             $1,305,000

2003                                          $1,000,000                                             $1,276,000

2004                                          $1,500,000                                             $1,864,000

2005                                          $1,500,000                                             $1,803,000

2006                                          $2,000,000                                             $2,329,000

2007                                          $2,000,000                                             $2,264,000

2008                                          $2,000,000                                             $2,180,000

2009                                          $3,500,000                                             $3,829,000

2010                                          Unlimited

2011                                          $5,000,000                                             $5,217,000

2012                                          $5,120,000                                             $5,234,000

2013                                          $5,250,000                                             $5,290,000

2014                                          $5,340,000                                             $5,295,000

2015                                          $5,430,000                                             $5,430,000

 

Author(s)

San Diego Real Estate Law

Are you ready for El Niño? More Importantly, is your home ready?

An El Niño continues to be predicted for California during this 2015-2016 winter storm season. This means the possibility of storms of major impact and far above-normal rainfall.

While there is no assurance that an El Niño will result in snow pack and rain far above “normal” levels, many in California will see the occurrence as positive, perhaps even an end to California’s prolonged drought, a condition that is having a major effect on the state’s commerce and economy.

How would an El Niño impact a San Diego County homeowner and what pre-planning steps should be undertaken . . . before our storm season arrives?

Homeowner’s Insurance:

Most homeowners have property damage insurance on their dwelling. Does your homeowner’s insurance provide coverage for water damage? Maybe yes, maybe no. Locating your insurance policy is usually the first hurdle to cross. Once your policy is in-hand, consider calling your insurance agent to discuss your coverage. Ask if you have coverage for damages caused by water intrusion resulting from rain.

If the answer is “no,” discuss the cost of adding such coverage.

If the answer is “yes,” your next question is: “Are there conditions to the coverage?” Insurance policies frequently require the storm to cause damage to the roof or structure first, thus allowing the rain into the home, before providing rain damage coverage.

Stated another way, if a home has a damaged roof prior to a damaging rain storm, insurance coverage will likely be denied. Make sure you understand your insurance policy. One method to do this is to explain your understanding of your policy coverage to your insurance agent, in your own words, so your agent can clarify any misunderstandings.

Roof Condition:

Water intrusion from a leaking roof is a major source of damage during periods of heavy rains. Water intrusion naturally leads to numerous consequential damages to both personal property and the residence. Warped dry wall, bulging ceilings and mold are just a few of the structural issues that may occur. Water damage to artwork, antiques, carpet and rugs can be devastating.

When did you last have your roof inspected? Now is a good time to schedule an inspection, including a written report and photographs. You will avoid worrisome stormy nights if you have your roof inspected and repaired before the storms arrive.

Roof Gutters and Drains:

Cleaning drains is a necessary fall chore, of greater importance with an El Niño predicted. Gutter seams should be visually inspected to be certain there is no evidence of water leakage, requiring repair.

Once the rain water goes into the gutter and down the drain, where does that fast moving water end up? Do your downspouts end at the foundation of your residence, allowing water to pool against the house, or worse, undermine the foundation?

Downspout extenders, to move water away from foundations, are readily available from hardware stores and online.

Windows and Doors:

Are your windows and doors watertight from wind-blown rain? Both can be easily checked with a garden hose spraying water on the doors and windows. If the current drought causes your conscience to not allow you to “waste” water to check for water tightness (perhaps not a waste in the long run), then visually inspect doors to be sure there are no gaps where daylight is showing.

With windows, be certain that windows shut tightly and look at the condition of the weather stripping. Replaced weather stripping on doors and windows will go a long way to keep rain out of the house, with the added benefit of keeping warm air in the house during colder weather.

El Niño could help California – just make sure you help your home stay ready.

Author(s)

San Diego Estate Law Firm - King Lear

King Lear’s Tragedy Can Teach Us About Estate Planning

You Won’t Always Be Master of Your Kingdom

When Shakespeare’s King Lear opens, Lear is seated in his castle, resplendent in his power and glory. He is the master of a kingdom.  His will is law.  He wants to retire in peace, with the knowledge that he has implemented a thoughtful estate plan that divides his kingdom among his three devoted and loving daughters.

He has no worries about probate or estate taxes.  He proclaims:

Give me the map there.  Know that we have divided
In three our kingdom; and ‘tis our fast intent
To shake all cares and business from our age,
Conferring them on younger strengths while we
Unburdened crawl toward death.  Our son of Cornwall,
And you our no less loving son of Albany,
We have this hour a constant will to publish
Our daughters’ several dowers, that future strife
May be prevented now.

(, Act I, Sc. 1, Lines 35-43.)

What could be better or wiser?  Lear’s plan should have enhanced his retirement and avoided post-death disputes among his daughters.  The result, however, was betrayal, madness, war and death.

Absolute Power Can Disappear Overnight

Shakespeare’s greatest tragedy reminds us that absolute power can disappear overnight, that human beings can break seemingly-binding agreements, and that the new generation does not always follow the ways of the old.  We are fools on the heath if we believe that an estate plan that ignores the human beings involved will stand the test of time.  Lear’s plan lasted just a few months.

Since it is a tragedy, King Lear magnifies humanity’s many weaknesses.  Even though we know that most families are not like Lear’s family and that many estate plans work well, Shakespeare’s dark vision suggests:

Keep your eyes open.

The daughter who tells you “I love you more than worlds can leave the matter,” may not love you at all.  The daughter who confesses, “Sure, I shall never marry like my sisters, to love my father all,” may be the daughter who really loves you.

Be willing to listen to honest advice.

If someone you have listened to says, “I tell thee thou dost evil,” don’t abruptly exile him from your kingdom.

Above all, be aware of the role of power in human relationships.

Lear divided his kingdom and his crown.  Two of his daughters agreed that they would let him visit their castles periodically with his knights.  However, when his knights started partying in the castles, his daughters broke their agreements and threw Lear out.

He wandered on the heath accompanied by his fool.  He had no power and never regained it.  The members of the younger generation who took his kingdom over exiled him and began implementing their own agendas in the kingdom they had received just months earlier.

Few characters in King Lear portray redeeming human values.  All of life is not King Lear, and many of us have loving and trustworthy familiesHowever, Shakespeare’s undoubted ability to artistically illustrate the truths of human relationships clearly shows that retirement and estate planning are not limited to the technical issues of hoped-for easy living, avoiding disputes and avoiding taxes.

All retirement and estate plans need to be created with a clear vision of the human beings who are intended to be benefitted by them, and the human beings who will be charged with implementing them.

A bad trustee can ruin a good trust.  A good trustee can save a bad trust.

Consider King Lear. 

Can a trust designed to last more than 100 years really be a good idea?  Lear’s attempt to impose his patriarchal design on his daughters failed.  A perpetual trust may be “the ultimate manifestation of patriarchal control . . . .”  (“A Critical Research Agenda For Wills, Trusts, and Estates,” 49 Real Property, Trust and Estate Law Journal, No. 2, Fall 2014.)

King Lear tells us that, in the end, it is not clear that the patriarch has much control.

Author(s)

San Diego Estate Planning Law Preview

Three Reasons You Need an Estate Plan

Many people have the view that estate planning is mostly for high net worth individuals who require complicated estate tax planning.  However, there are many important reasons to do an estate plan other than tax planning, and these reasons apply to everyone, no matter the size of your estate.  Here are three reasons to consider doing an estate plan even if estate taxes are not your primary concern:

1. Planning for Incapacity

At some point in life, whether due to age, illness, injury, or other health conditions, many of us will become unable to independently manage our own finances.  If you become unable to manage your own finances, the agent you select in your estate plan can step in to make sure your bills continue to be paid and that your finances continue to be managed to provide for your financial needs.  Preparing an estate plan beforehand allows you to carefully choose people you trust to manage your property if you are no longer able to do so, and having the proper estate plan documents in place will give your agents the authority to act on your behalf quickly to provide for your needs without lengthy delays and in most cases without court involvement.

Planning for incapacity also involves planning for your health care in addition to your finances.  Preparing an estate plan gives you the opportunity to express your wishes relating to the treatment and care you would like to receive and allows you to choose people you trust to make important decisions relating to your health care, particularly difficult end of life decisions, if you are not able to do so yourself.

2. Nominate Guardians for Minor Children

If you have children under age 18, another important reason to do an estate plan is to nominate the legal guardians of your minor children.  For many parents, it is difficult to decide who will be responsible for raising and caring for their children after they are gone.  Nominating a guardian in your estate plan will give you assurance that the person you choose will be the person appointed as guardian of your children by the court.

3. Avoid Family Conflict

Dividing a bank account equally among several people is usually a matter of simple math, and there is not much reason to disagree as long as everyone gets the same amount.  However, it can be difficult for family members to agree when deciding who is to receive, for example, great-great-great-great-grandmother’s gold ring or the antique rocking chair that has been in the family for generations when there is only one of the item and several people interested in owning it.  Because of the high sentimental value these items sometimes have, deciding you will own it can become the source of deep family conflict.  The same principle applies to larger or more valuable items, such as the family home or other valuable real estate, where dividing it among several people might not be possible or practical.

Preparing an estate plan gives you the opportunity to specifically designate how you want your property distributed.  With a clear direction in your estate plan as to which family members should receive the property you specify, you can help avoid or reduce the possibility of a conflict over the distribution of your property among your family members after your death.

Depending on our circumstances and stage in life, some of the reasons discussed in this article will be more important or relevant to us than others.  These issues affect us and our families on a more personal level, and at some point most of us will be affected by one or more of the issues mentioned here no matter how much property we own or the value of your assets.  By preparing an estate plan before these issues arise, we can have confidence that that they will be managed effectively and efficiently.

Author(s)

Grandmother and Keyboard

Is Your Grandmother On Facebook?

Young people aren’t the only ones using social media.

People of all ages are using social media to share information, build and maintain relationships, and keep in touch with family and friends, primarily through sharing digital photos and videos.  Many people have also created music or book collections that are entirely digital.  These collections may contain thousands of dollars’ worth of books and music, but they can only be accessed digitally.

The exact means of access may be different depending on the specific type of media, but one thing they have in common is that access usually requires a login or password.

What is also common is that, depending on the media provider, getting access to these items after the death of the account owner can be difficult or impossible.

Family members are often anxious about receiving photos, home videos, journals, music and books of a deceased person, but find that the means for obtaining this information is difficult at best.  The laws affecting the rights to these digital assets are having difficulty keeping up with the advances in technology and the development of social media.

It is clear that digital assets and social media are ever evolving.

As estate planners, we can provide a valuable service to our clients by helping to guide them in arranging for the transfer of these important digital assets.  However, until the laws affecting these assets and the policies of the media providers becomes more stabilized and established, finding good resources to keep updated and informed as these issues develop is especially important to be able to properly advise clients.

The Digital Beyond is one helpful resource in this area. The “Legal” tab is chalk full of helpful articles and information for the “digital afterlife.” A good estate planner should be able to assist their clients with tangible assets, and navigate the waters of digital assets.

 

Author(s)

San Diego Estate Tax Law

There is a Free Lunch – Rethinking Your Relationship With the Estate Tax System

Americans have been trained to fear the US Estate Tax system, sometimes called the death tax system.

However, now that a single person can transfer more than $5 million through the estate tax system without paying a tax, the time has come for us to change our way of thinking.  We need to change our thinking because the estate tax system includes a hidden gift that is now extremely valuable.

The gift is this:  Assets that pass through the estate tax system receive a new basis, which is the value of the asset on the date of death.  Given the number of assets that have increased in value over the course of the past 40-50 years, the new basis at death is frequently an increased “stepped up” basis.

To begin at the beginning, the tax basis of an asset is generally the price that a taxpayer paid for the asset.  The tax basis is important, because it is the measuring point for determining a taxpayer’s gain or loss on disposition of the asset.  So, if a taxpayer paid $1.00 for a share of stock, then sells it for $10.00, the taxpayer’s gain is $9.00, and the taxpayer has to report that gain and pay a tax on it.

The lesson is: The higher an asset’s basis, the better.

The problem is that basis increases generally are not free.  For example, if a person owns a rental property, he or she can increase basis by spending money on the property with the addition of a capital improvement.  The basis adjustment is the direct result of spending money.

Historically, the basis adjustment that is available through the estate tax system – like other basis adjustments – came with a price tag.  The property was subject to estate tax and it emerged from a painful taxation system with a new basis because it had generated a tax payable to the IRS.

Now, though the estate tax exemption is so high that people can use the estate tax system to acquire something that was inconceivable not so long ago: free basis.

The logic to free basis:

  1. The price of the basis adjustment at death has been the need to expose the asset to the estate tax system and the consequent need to pay an estate tax at high rates.
  2. Now, though, the estate tax exemption is so high that many people can expose their entire fortunes to the estate tax system without paying any tax, and many can do this without even filing an estate tax return.
  3. Since Congress did not change the basis adjustment rules when it changed the exemption amounts, the assets that go through the estate tax system painlessly (and perhaps without even filing a return) still receive a basis increase at no cost, which equals free basis.

The key underlying lesson to learn from the current situation is that – even if you cannot look at the US Estate Tax system as a friend – you can look at the system as a neighbor you need to learn to live with.

A few ideas to help you take advantage of free basis:

  1. Historically, parents have given assets that were likely to appreciate to children, so that the appreciation would not be exposed to the estate tax system at the parent’s death. However, when the gift was made, the parent’s basis would transfer to the child, and would not be stepped-up at the parent’s death.  This made sense when the estate tax system imposed a price.  Now that the system does not impose a price for most people, it makes sense for the parent to hold the asset until death so that it can be transferred to the child with a free basis increase.
  1. You probably have a natural aversion to taking money from your IRA, because you pay income tax on your withdrawals. However, if your aversion to taking money from your IRA were to cause you to sell an asset to pay tax at the capital gains rate, you might reconsider.  The assets in the IRA will not get a basis increase when you die.  The capital asset outside the IRA will get a basis increase.  Your situation might be improved by taking money from the IRA and leaving the capital asset on hand so that it can be eligible for free basis.
  1. Think twice before making annual exclusion gifts with anything but cash.
  1. Don’t get involved with family limited partnerships and fractional interest discounting unless you are rich enough to really need them.
  1. Recognize that a traditional A/B Trust may result in the loss of a stepped-up basis at the death of the second spouse. While an A/B Trust can still make good sense for family reasons (especially dealing with a blended family), you should be sure that the trust has been modified to provide a method for obtaining an increased basis. The attorneys in our firm are adept at accomplishing this without disrupting family dynamics.

Author(s)