Think of Estate Planning as Stewardship for the Future

Despite our love of planning, the one thing we often do not plan for, is the one thing that we can be certain of. Our own passing is not something pleasant, but it is definite. Estate planning is seen as an unpleasant or even dreaded task, says The Message in the article “Estate planning is stewardship.” However, think of estate planning as a message to the future and stewardship of your life’s work.

Some people think that if they make plans for their estate, their lives will end. They acknowledge that this doesn’t make sense, but still they feel that way. Others take a more cavalier approach and say that “someone else will have to deal with that mess when I’m gone.”

However, we should plan for the future, if only to ensure that our children and grandchildren, if we have them, or friends and loved ones, have an easier time of it when we pass away.

A thought-out estate plan is a gift to those we love.

Start by considering the people who are most important to you. This should include anyone in your care during your lifetime, and for whom you wish to provide care after your death. That may be your children, spouse, grandchildren, parents, nieces and nephews, as well as those you wish to take care of with either a monetary gift or a personal item that has meaning for you.

This is also the time to consider whether you’d like to leave some of your assets to a house of worship or other charity that has meaning to you. It might be an animal shelter, community center, or any place that you have a connection to. Charitable giving can also be a part of your legacy.

Your assets need to be listed in a careful inventory. It is important to include bank and investment accounts, your home, a second home or any rental property, cars, boats, jewelry, firearms and anything of significance. You may want to speak with your heirs to learn whether there are any of your personal possessions that have great meaning to them and figure out to whom you want to leave these items. Some of these items have more sentimental than market value, but they are equally important to address in an estate plan.

There are other assets to address: life insurance policies, annuities, IRAs and other retirement plans, along with pension accounts. Note that these assets likely have a beneficiary designation and they are not distributed by your will. Whoever the beneficiary is listed on these documents will receive these assets upon your death, regardless of what your will says.

If you have not reviewed these beneficiary designations in more than three years, it would be wise to review them. The IRA that you opened at your first job some thirty years ago may have designated someone you may not even know now! Once you pass, there will be no way to change any of these beneficiaries.

Work with an experienced estate planning attorney to create your last will and testament. For most people, a simple will can be used to transfer assets to heirs.

Many people express concern about the cost of estate planning. Remember that there are important and long-lasting decisions included in your estate plan, so it is worth the time, energy and money to make sure these plans are created properly.

Compare the cost of an estate plan to the cost of buying tires for a car. Tires are a cost of owning a car, but it’s better to get a good set of tires and pay the price up front, than it is to buy an inexpensive set and find out they don’t hold the road in a bad situation. It’s a good analogy for estate planning.

Reference: The Message (June 14, 2019) “Estate planning is stewardship.”

 

Estate Planning Basics: Property Transfers & Gift Taxes

Estate Planning Basics: As we age, our needs change. That includes our needs for the property that we own. For one person, the family home was rented to the daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land. The answers are presented in the article “Dealing with property transfers and gift taxes” from Chicago Tribune.

For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.

When you give someone a home, they receive it at the price that was paid for it plus these costs.

Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.

It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.

This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate attorney, who can evaluate all the factors, since every situation is different. One suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.

The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.

As for the question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.

A meeting with an estate planning attorney and going over Estate Planning Basics is the best way to ensure that the transfer of a family home to a family member is handled correctly and that there are no surprises.

Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”