Estate Tax

Gifts of your real estate can be a bad idea for taxes. What?????? Many of you have probably heard that you should give real estate to your kids to help minimize estate taxes….yes that is still true….but that is only applicable if you have a large estate that will be subject to estate tax.  For most people estate tax is not a real concern.   Thanks to Congress and its ability to get only politics done….we don’t know who is subject to estate tax at the moment. We’ll know that answer at least by the end of 2010 but for now let’s just assume that if you have less than $1,000,000 then you have no estate tax concerns. 

 So if you have no estate tax concerns, a gift of your real estate is not saving your family estate taxes; you are wasting your time and money.  Of course your kids may not feel that way…who doesn’t enjoy ownership in a beach house or mountain cottage. However they may be interested to learn that the gifts can be bad for their income taxes if they ever plan to sell the property.

If you make a gift of your real estate during life instead of passing the property at death, your kids will use the same cost basis you have in the property to determine their income tax if they ever sell the property.  Basically your kids step into your shoes with regard to the built in capital gain in the property.  Admittedly, with the recent real estate turmoil, appreciated property ain’t what it used to be, but there are still plenty of old family farms out there that have vast appreciation built in which has not yet been taxed.  If that property is passed at death, the cost basis is increased to the fair market value of the property and the capital gain is wiped out, at least to the extent the gain is below $1,300,000.  On the other hand, if you transfer the property through gift during life, you loose the benefit of this basis adjustment and your kids will have higher income taxes if they ever sell the property.  This rule is true for all kinds of property (stock, art, etc), but real estate is the most common application.

As with any area of tax law there are some exceptions and special facts which may dictate a different plan of action.  For example, if the real estate is a principal residence occupied by the child, or if the property is expected to appreciate substantially, or if the family is exploring planning to help with medicaid qualification, then these factors may justify a gift even in the face of the potential income tax detriments.  Also, the basis adjustment rules are in flux at the moment and are likely to change further as part of the resolution of the estate tax, whenever that happens.

If you are considering a gift of real estate, make sure you consult your tax advisor first to determine whether you are gaining or loosing any tax benefits.



George Bailey….you’re worth more dead than alive!

Remember poor George Bailey and his life insurance?  Ok that is not one of the high points of It’s a Wonderful Life….but that quote always reminds me of a common misunderstanding my clients have about counting their assets for estate tax planning purposes.  Life insurance is an often overlooked asset that greatly enhances the value of your estate.  Even if your life insurance is a term policy and has no cash value, we have to look at the potential death proceeds in determining the size of your estate and whether we need to worry about estate tax.

 That’s right…even though you’ve always heard that life insurance is not subject to tax; that is only partially correct.  Life insurance is generally not subject to income tax, but if you own a life insurance policy on your own life, the death proceeds are counted as part of your estate for estate tax purposes regardless of who gets those proceeds.  So if you add up all of your assets and then you lump the death proceeds from a big life insurance policy on top, you may find that you have an estate tax issue.  Although there is no estate tax at the moment, the tax will be automatically reinstated no later than January 1, 2011 and unless Congress gets it act together, the individual exemption will be $1,000,000 at that point (see my January 2010 Counselor’s Corner).  At that level life insurance will have a much bigger estate tax planning impact for numerous clients.

 If you have a large life insurance policy as part of your estate, what can you do?  If your adult children are the intended beneficiaries, you can transfer the policy to your children as a gift; if the policy has little or no cash value then this can be a very efficient way to reduce your future taxable estate.  On the other hand if you have minor children or if you wouldn’t trust your adult children to take care of your dog much less own and maintain a valuable insurance policy, then your planning may require the creation of a life insurance trust to own the policy.  In either case, you will have to consider a few important facts such as the current cash value and the continued premium payments for the policy.  If you plan to continue to make the premium payments to maintain the policy then those annual payments will be gifts, and your advisors will need to ensure that you properly use your gift tax exemptions to avoid any gift tax consequences.

 One more little trick the IRS has is the so-called 3 year rule.  If you read this article and decide that it sounds like a great idea and give that life insurance policy to your kids, please be sure to consult your attorney or other tax advisors first.  Second be sure to live at least three more years.  If you die within three years of gifting a life insurance policy then the gift is basically ignored and the death proceeds will be included in your estate.  As you might expect, enterprising attorneys have devised ways to avoid the three year rule, but these options can be pretty complicated and for that you’ll have to talk to you own counselor.

 Remember any day you don’t have to think about death or taxes…It truly is a Wonderful Life!


Well it finally happend — something that I never thought I would see.  No, my kids didn’t clean up their rooms without being asked – something even more remarkable. Congress has allowed our federal estate tax to expire. There have been an abundance of articles written on this issue in the last few weeks and I have been delaying this newsletter in hopes that I would be able to bring you some “hot off the press” discussion of new tax legislation. Congress is simply not cooperating with me.

So what is all the big talk on this estate tax repeal? Under the current law, anyone dying in 2010 is not subject to estate tax, no matter how large their estate. However, it is widely believed that Congress will enact legislation which will reintroduce the tax retroactive to January 1 of this year with an exemption yet to be determined but likely equal to the amount which was available in 2009 ($3,500,000). If Congress doesn’t act, then in 2011 the estate tax will return with a vengeance; the law will revert to what existed in 2001 with top rate of 55% and, more importantly, a reduction in the exemption to $1,000,000.What does this mean for you or your friends or clients? Today is a good day to die. However, I am not suggesting that as a prudent estate plan. My advice is that you all continue to pay attention to the headlines to see what action Congress may take. For most of you there should be no immediate need to modify your estate planning documents, but it is important to understand how the ground rules may change in this area of tax law. When we have some definitive action from Congress, I am sure I will have something more to say.

Any of you paying attention to this estate tax repeal saga will note that I haven’t mentioned “carryover basis” rules. When Congress gave us this 2010 estate tax repeal, it included a little surprise income tax increase by changing the way capital gains taxes are determined for heirs of a decedent’s estate. Imagine that. I will spare you all of the ugly details, but if you want to know more, a quick internet search will give you plenty of bedtime reading.

While I am on the subject of taxes, I do want to mention one other income tax change that might be of interest. As of January 1 all of you can convert your traditional IRA’s into a Roth IRA. Previously this conversion option was subject to annual income limitations, but those limitations have been eliminated. With a Roth IRA your assets grow tax-free and your distributions during retirement will be tax-free. A traditional IRA gets you the same tax-free growth but distributions are subject to tax. The trade off here is that the conversion to the Roth will generate an immediate income tax liability based on the value of the assets converted. So the choice is to pay tax now or pay later. If you believe that your tax rates will be higher in retirement then that weighs in favor of converting now. However there are many variables that impact this decision, including future changes in tax laws and whether you have other sources of liquidity to pay the current tax liability, so I encourage you to talk to your tax advisors about this planning option. Also keep in mind that Congress really wants you to convert in 2010 and the law includes special rules that will allow you to defer payment of your income tax over two years. This makes the conversion option a lot more attractive. Remember the show Let’s Make a Deal…I hope we all pick the correct door!


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