Estate Planning Question

[Ready]

DH and I met with our attorney to review our will/trust/DPA/AHCD. In reviewing our current documents, he advised making a change which seemed a bit odd to me, so I'm hoping someone can let me know if it sounds right.

We currently own our home in two trusts as 50/50 equal owners. The deed was updated to reflect a 50/50 ownership in each trust about a year ago. At the time, we were not married, so we had the separate trusts.

We got married this year, and now the attorney is advising we combine the two trusts into one a retitle the home to be 100% owned by one trust to which we are both co-owners. He is telling us to do this so that if one of us dies, the entire value of the home would pass to the survivor with a stepped up basis.

We paid $1M for the home, and it is now worth $3M. We know that even with the $500K exemption, we would be looking at capital gains taxes on $1.5M if we sell. But he is suggesting that if we continue to own the home until one of us dies, the survivor would essentially owe zero capital gains taxes on the home because we would inherit it at the current market value of $3M. This would essentially allow us to avoid $400K in federal and CA state taxes. It seems to good to be true.

Am I missing something, or is this a legitimate way to avoid paying capital gains taxes on the home in the event one of us dies while we own the home?

[pb4uski]

That sounds right since you are in a community property state the entire asset basis is stepped up.

See https://ttlc.intuit.com/questions/25...-when-one-dies

Quote:

Example: Carmen and Electra are husband and wife. They live in Wisconsin (a community property state). Electra just died. They owned a home (community property) valued at $500,000 as of Electra’s date of death. Solution: $500,000 – they are married, they live in a community property state, so Carmen gets a full step-up in basis upon his spouse’s death.

[MooreBonds]

Quote:

Originally Posted by pb4uski That sounds right since you are in a community property state the entire asset basis is stepped up. See https://ttlc.intuit.com/questions/25...-when-one-dies

But I think you are missing a critical component:

The house is CURRENTLY owned jointly 50:50 by two individuals' trusts. Whomever dies first, the surviving spouse will inherit the deceased spouse's 50% share.

HOWEVER - the lawyer is proposing they have a SINGLE TRUST take ownership of the house. The lawyer is NOT proposing that they do a JTWROS (Joint Tenants With Rights of Survivorship), but rather a revocable living trust (or other trust vehicle) as the entity owning the house.

If they did JTWROS, then the surviving spouse, it appears, would gain the step-up in basis. However, as far as I am aware, you cannot have a trust own property with a JTWROS designation.


If they retitle it with a single trust as the laywer is suggesting, then it sounds like they are rolling the dice that whomever's trust owns it will be the first to die!

It doesn't matter who the trustees are that are listed on the trust - if a revocable living trust owns a house, it is the single person identified in the RLT as the owner. It isn't "both" trustees that own the trust, and it isn't both people that own the house - just the trust owns the house (which, by extension, is legally the trust grantor).

If the husband's RLT owns the house, and the wife passes on first, the tax basis of the house is unchanged, is it not?

However, if they keep both trusts owning the house 50:50, then at least they are assured that half of the house value will get stepped-up basis when the first passes on, rather than having to gamble on either all of the house gets stepped-up basis or none of it does after the first spouse's passing.

[GoodWishes]

Over the years, we have talked to several lawyers and financial advisers. Here are our understandings.

In California which is a community property state, you will not get the full double step up in basis if you title your property as joint tenant or 50/50 tenants in common. Your properties must be title as community properties to get the full double step up in basis. If you put them in a trust (as we did), there are some paragraphs in our trust that specific all our properties are intended to be owned as community properties.

Did a quick Google search, already saw 2 links that confirms some of our understanding. I am sure more can be found if more time is spent.

Step-Up in Basis Rule-Common Mistakes | Financial Alternatives Inc

Rossi: Death and taxes - Understanding how 'step-up in basis' works | NJ.com

[pb4uski]

Quote:

Originally Posted by MooreBonds But I think you are missing a critical component....

You are missing a critical component... the two people would both be beneficiaries of the trust or "co-owners" as the OP puts it.

The new single trust would own the house and the couple would be co-beneficiaries of the trust. Since CA is a community property state, if it is set up properly then they would get a step-up in basis of 100% rather than 50%.

This quote from one of the links that GoodWishes posted is totally on point:

Quote:

Those who reside in a community property state such as California can take advantage of the “Double Step-up in basis” rule with proper planning. Here’s an example of how the “double” step-up basis works: Henry and Alice bought a house in 1982 for $70,000. They created a revocable living trust and deeded the house to the trust. When Henry died in 2010, the house stayed in the survivor’s trust and Alice got the full step-up basis for the house which was the market value at Henry’s death of $800,000. When Alice passed away in 2013, the house was worth $850,000 which became the new basis for Alice’s son John who inherited it. In short, John inherited a house that essentially had stepped up in basis twice to $850,000! Consider the amount of taxes John would have had to pay if he had not been able to use the “Double Step-Up” rule!

[donheff]

This stuff is confusing as he**. It strikes me that JTROS works as well for most people. The surviving spouse gets half the step up at death one and the kids get the rest of the step up at death of spouse two. The remainder of the untaxed growth also gets stepped up at the second death and no tax is paid (unless the estate is huge) due to the estate tax exemption. If the state doesn't follow the Federal estate tax exemption it might be worth seeing if this double step up deal applies for state taxes. Am I missing something?

[pb4uski]

This thread has got me to thinking... if a home is owned JTROS and one of the couple is on their deathbed, I wonder if is there a play to transfer ownership to that spouse and have that spouse will it to the healthy spouse to get a 100% step-up in basis rather than a 50% step-up in basis? Even if it works it would only be worthwhile if the unrealized gain exceeds the $500k exemption amount.

[gcgang]

Quote:

Originally Posted by pb4uski This thread has got me to thinking... if a home is owned JTROS and one of the couple is on their deathbed, I wonder if is there a play to transfer ownership to that spouse and have that spouse will it to the healthy spouse to get a 100% step-up in basis rather than a 50% step-up in basis? Even if it works it would only be worthwhile if the unrealized gain exceeds the $500k exemption amount.

http://definitions.uslegal.com/i/in-...tion-of-death/

I think that would be a gift in contemplation of death, and won't work.


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[sheehs1]

I'm not sure we have enough information to advise you at this point.
Do you each have different heirs you want to protect? Meaning do you want your heirs to ultimately get 50% of the house and your spouse has different heirs? The answer to that question is needed. I ask this question because of the separate ownership structure you noted from the beginning.

If you both have the "same" heirs that will inherit the home or it's value upon the death of the second spouse it makes it easier. In this case, I would think JTROS would take care of it. If property in your state can not be held by a the trust and titled this way, I'd seriously consider taking it out of trust…to simplify the matter.

If you have separate heirs, it becomes more complicated and you will have to keep track of your ownership percentage all the way thru so that each of your heirs ultimately inherit what you want them to inherit without one side getting it all. My twin sister and her husband have this situation and they have set it up so that the integrity of what they own follows all the way thru.

You each have a Unified Tax Credit amount of what I think now is $5.35 million. No estate taxes are due for anything under that amount, Although there may be state taxes. My point here is that i don't think any capital gains taxes are due "at death" either for the first spouse or the second. Perhaps if the property is sold but if sold after the death of both of you, there has already been a stepped up basis or two wiping out capital gains.

So your lawyer is correct that cap gains don't apply….but I think he is wrong in alluding that cap gains may apply if left in the 2 original trusts. The property hasn't sold so why would there be ANY cap gains? You may have estate taxes but only if your spouse has assets over the $5.35 million.

It is typically the last spouse to die that has the estate tax issue, Provided a marital trust has been created for the first spouse to die for the benefit of the second spouse.
If under the 5.35 million mark, all assets go into a marital trust for the benefit of the second spouse and NO taxes are due. They are delayed. If the assets of the 2nd spouse to die remain under that 5.35 million mark, there are no federal estate taxes due.

Keep an eye on the Unified Tax Credit amounts, the amount that can pass free of tax. it has changed a lot over the last 15 years. There is nothing that says it won't change in the future.

Hope I'm understanding some of what you wanted correctly. Please verify with your lawyer!

[Ready]

Thanks for the feedback so far everyone, it's been very helpful. A few clarifying points:

We hold title as JTWROS. Prior to 2013 we had no trust at all. In 2013 we set up two trusts with 50/50 ownership as two single people. Now that we are married, the attorney is advising to combine the two trusts to take advantage of the double step up basis.

No taxes would be due upon one of our deaths. However, it is conceivable that after one of us passes, the survivor would not want to live in such a large house. Or, we may need to sell it and move to an assisted living facility. So the ability to avoid all capital gains under that scenario is significant to us.

We have no children, so our heirs are either family members or charity. And we both have the same heirs, so no issue on worrying about who gets what depending on who dies first. If either of us passes, the surviving spouse inherits 100% immediately.

The attorney told me that just holding the house as JTWROS outside of a trust would only result in a stepped up basis for half the home upon one of our deaths. So placing the home in the trust, and keeping it as JTWROS, adds the benefit of the double step up basis.

[sheehs1]

Got it. It "reads" like GoodWishes post answers your question.

I'm a bit unclear on how a trust, it's own legal entity, can own property as JTWROS. Joint with "whom" or "what"?

[pb4uski]

I guess that my view is that what your attorney is telling you squares up with the example in post #5 so chances are high that you are getting good advice.

[GoodWishes]

Agree about your lawyer's advice.

In your case, when one passes away, the other might want to sell, definitely make sure that you are setup for the 100% step up, not 50%. We are setup with that same thinking. We started out with joint tenant, then changed to community property and eventually into a trust.

[Ready]

Thanks to all for the input. I always assumed that some day I would have a huge tax bill if I sold the house. Knowing that if one of us passes, and the other needs to move into assisted living, that we can eliminate $500K in taxes, is a serious game changer. It even makes me more comfortable about trusting that a 4% SWR will work for me, knowing worst case one of us eventually can sell the home and retain all of the proceeds without losing a huge portion of it to taxes.

Best $1,000 I ever spent on legal fees! If anyone else is in a similar situation to us, I would definitely look further into this tax strategy.