Comparing Trusts, Wills and Joint Tenancy and taxes

[last426]

I did a trust for a close friend a few years ago and stumbled across a letter I wrote when he asked some things about the differences.  I thought maybe someone here would benefit. It follows:

Shame on you John – you thrust me into my lawyer thought process!  I have to do a disclaimer because I didn't volunteer to give estate planning advice, only to help with the living trust.  If you want estate planning stuff, I recommend that you go to an estate planning lawyer. 

That being said, when I compare wills, joint tenancy and living trusts I look at what each accomplishes and at what cost.  Well, all of them transfer property after death but some transfer it easier and/or faster.  Generally a will needs to be filed (this makes it all public – I don't know if you care about that) with a court and then is subject to costs and time delays associated with courts – often attorneys are used for this.  A positive is that the will transfers the property upon death and as such the IRS values the property's basis as a "stepped-up" basis, stepped up to the value at the time of death.  This can be a huge tax advantage for the person receiving the property.

Joint tenancy also transfers the property immediately upon death and it is not public (well, deeds are recorded so it might be considered public).  But there are some downsides to it.  First, in a joint tenancy there, obviously, are joint owners.  Issues may arise if one wants to sell and the other does not want to or if one of the owners is held liable for something.  Also, issues arise if one owner wants to will his part to someone other than the joint owner – not easy.  The main issue with joint tenancy is tax.  For instance, assume that you own the Neil property and decide to put it into joint tenancy with someone.  That change of title would be considered a gift of half the property and gift taxes would be due or it would be taken into account in your lifetime exemption (I think that's what they call it nowadays).  But the real hit would come when the receiving person goes to sell it after death.  When a gift is given it has the same cost basis as it did with the giver, so instead of stepping up after death, is really goes back.  In the case of Neil assume that you got it for 50,000, it went to 200,000 and you died.  The other joint tenant, when they tried to sell it, would owe taxes on everything over 50,000.  If it was done by will it would be on everything over 200,000, quite an advantage.

A living trust transfers the property to the trust and that is normally not a taxable event.  Once in the trust the transferor maintains all control over the property.  On death, the successor trustee steps in for the dead person.  This successor cannot change the trust but must only do what it says – that is why that person should be one who you trust.  The document is not public and the successor can start doing it as soon as the person dies.  Also, the property gets the stepped-up basis. Hope this helps, Kim.

And that's that.  If you wanna see a hemi, go to www.marlia.com.
   

[PocketThunder]

thanks for the heads up.   

[bakerhillpins]

Great post! 

We already have our estate setup with a living trust. I can't stress enough how important these things are. Estate planning may feel morbid and I know quite a few people who make up tons of excuses for not doing it but trust me, not having anything is a ROYAL PITA for those left behind. Even with planned estates it's still not a cake walk. 

[bull]

Maybe it's just a typographical error that's screwing me up but I don't understand this sentence in the "joint tenancy" paragraph:

When a gift is given it has the same cost basis as it did with the giver, so instead of stepping up after death, is really goes back.

Also, are there any do-it-yourself or fill-in-the-blanks online wills that are worth a lick?

[bakerhillpins]

Bull

The sentence after is meant to clarify that statement with an example. It is a point of what you are charged in taxes on the capital gains.

In the case of Neil assume that you got it for 50,000, it went to 200,000 and you died.  The other joint tenant, when they tried to sell it, would owe taxes on everything over 50,000.

The Gift was the thing you got for 50k when they were alive. With Joint Tenancy the things value (50k) on the day it was given is considered the Cost Basis. (simply put the value of the item when you received it) On the day that the giver passes the "Gift" is now worth 200k. So the gains you made were 150k and you are taxed on that "income". The important point is that the value of the item "goes back" to its value on the day you got it.

In the others the Cost Basis (value of the item when you received it) would be "stepped up after death", meaning that even though the day the Will/Trust was signed the value of the thing was 50k, the value when you received it is determined to be the value when they passed, or 200k. So in this case you would have capital gains of $0 if you immediately sold it.

Another way to look at it is - With JT they "day you received it" is the day the JT went into effect not the day of the other person's death. In the other vehicles the "day you received it" is considered the day of the other person's death.

Receiving something at the time of death can be a mixed bag. I was an heir recently and received some stock on the day my grandfather died. This was before the market tanked so I have a cost basis (value on the day of death) for the stock when it was riding high. Since the estate was still being settled I didn't have access to the stock, only the executor did. Then the economy tanked and the stock went into the crapper (Bear Sterns  ). So in my case the cost basis is high and its now value is low  , so I can claim it as a loss on my taxes when I go to sell it.

I hope that helped (I think I got that right)
Bryan

[ITSA426]

Great topic but if you're doing the estate/end of life planning don't forget about who gets to make the end of life and medical power of attorney decisions and all that.

Probably easiest just not to die!

[last426]

[snip]

Thanks for the clarification.  Here is the scoop on gifts (like what happens if a mom puts her kid on title for the house).  The kid gets his mom's cost basis, not the basis on the date of the gift.  So if she bought the house for 15k and gave it to her kid the taxes are on everything over 15k.  But what if the asset went down?  Assume she bought the house for 100k, gave it to the kid when it was worth 90k, and now it's worth 50k.  Tricky IRS says now the kid can take a loss but not 50k (100-50), only 40k (90-50) because they value it on the date of the gift.  In other words, they get it both ways.