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Ask Todd: Is gifting real estate always a bad idea? · The Financial Exchange Show

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  Speaker 1: This is Ask Todd on the Financial Exchange Radio Network.
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  Speaker 2: six three. Mister Lutsky, how are you doing today?
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  Speaker 3: I am never better? How you doing? Not great? No,
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  Speaker 3: something's always wrong with you.
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  Speaker 2: Tubba margin fell on my foot three weeks ago and
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  Speaker 3: Yeah, me neither. Todd.
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  Speaker 2: Want to talk to you a little bit about gifting
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  Speaker 2: real estate.
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  Speaker 3: Is it always a bad idea?
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  Speaker 4: You hate to answer questions like that. The carte blanche
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  Speaker 4: answer is complicated. So I'm gonna do it this way lawyers, Yeah, yeah,
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  Speaker 4: it depends right. I could say that, but I don't
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  Speaker 4: like to say that. So so what I'm gonna say
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  Speaker 4: is that generally it's probably not a great idea, and
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  Speaker 4: he'll come and why, Well, you know, generally you have
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  Speaker 4: probably purchased the real estate long ago, and first of all,
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  Speaker 4: if it's your home, you probably don't want to give
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  Speaker 4: away your home because for obvious reasons, it's your home
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  Speaker 4: and you want to continue to control it and own it.
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  Speaker 3: Enjoy it.
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  Speaker 4: But other types of real estate, maybe it's that vacation
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  Speaker 4: home you bought long ago, and you think getting it
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  Speaker 4: out of your you know, your name into a trust
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  Speaker 4: for the benefit of children sounds like a great idea.
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  Speaker 4: Or that rental property that I may have purchased long
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  Speaker 4: ago but have been renting it for let's say over
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  Speaker 4: twenty seven and a half years. I use that because
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  Speaker 4: that's the time in which you can fully depreciate your
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  Speaker 4: basis on rental property. And so if you give those away,
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  Speaker 4: likely those have appreciated over time, and so the built
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  Speaker 4: in gain. And I'll just stick with the idea of
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  Speaker 4: a rental property because they say, oh, get that out
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  Speaker 4: of my estate. Let's say I bought it for one
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  Speaker 4: hundred thousand dollars, depreciated it to zero, it's worth a
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  Speaker 4: million today. That, by the way, is not an uncommon situation.
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  Speaker 4: I make it sound like that's a crazy result. Sure,
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  Speaker 4: And if you give that away, that means there's a
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  Speaker 4: million dollars of gain built in to that to that
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  Speaker 4: property because as zero basis. And by the way, some
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  Speaker 4: of the gain, the one hundred thousand dollars that's associated
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  Speaker 4: with depreciation is taxed at ordinary income, not capital gains rate.
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  Speaker 4: So let's just say thirty percent for easy numbers on everything.
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  Speaker 3: And I can't say.
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  Speaker 4: Thirty percent because we've got this Massachusetts millionaire's tax of
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  Speaker 4: four percent, so you could run into that if you're
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  Speaker 4: slightly over that amount. So if you give that away,
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  Speaker 4: you're trapping a million dollars of gain at thirty percent.
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  Speaker 4: If my estate is not over fifteen million come January one,
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  Speaker 4: twenty twenty six, I'm not giving it away to save
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  Speaker 4: any federalist at tax. So that's a forty percent number.
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  Speaker 4: US Massachusetts another twelve percent, that's fifty two percent. Well,
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  Speaker 4: that's that's a good idea. But if I'm only giving
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  Speaker 4: it away to save Massachusetts state tax because I'm under
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  Speaker 4: the exemption amount, well then I'm only saving twelve percent. Well,
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  Speaker 4: I'm trapping thirty percent capital gains to save twelve Probably
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  Speaker 4: not a good idea. So that's why generally that's not
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  Speaker 4: a good idea to give away. But you know, if
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  Speaker 4: your assets have if you're if you're saving the fifty
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  Speaker 4: two percent, then then so be it might might be okay.
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  Speaker 4: So that that's why it's it's probably gonna be the
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  Speaker 4: ninety percent of the time. Probably not unless you recently
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  Speaker 4: bought something and is fully stepped up already. Well, then
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  Speaker 4: maybe that's okay because it has high basis. So hope
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  Speaker 4: that answers your.
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  Speaker 2: All right, let's get to your calls with Todd. First up,
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  Speaker 2: we got Paul in Lester. Paul, what is your question
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  Speaker 2: for TODDI.
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  Speaker 5: Thanks for taking my call. So my mother we have
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  Speaker 5: a summer home in Maine. On a lake, and my
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  Speaker 5: mother passed away ten years ago left it to me
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  Speaker 5: and my four siblings in her will, and it's not
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  Speaker 5: The wording is basically it goes to all of us
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  Speaker 5: sequel shares until somebody dies and everybody else gets another portion.
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  Speaker 5: And it's still in my mother's name. You know, it's
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  Speaker 5: never been The tax bill comes made out to my
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  Speaker 5: mother and I'm wondering if there's something I need to
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  Speaker 5: do or should do or so.
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  Speaker 4: So, Yeah, this is a you need to be very
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  Speaker 4: clear about what the will actually says. In other words, Generally,
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  Speaker 4: wills don't end up holding things in trust because they're
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  Speaker 4: will I mean, could it. It could, but you need
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  Speaker 4: to see what the trust actually says. In other words,
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  Speaker 4: if it says I leave all my real estate equally
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  Speaker 4: to my kids, if living.
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  Speaker 3: Pay it out, give it.
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  Speaker 4: To them, does it say that or does it say
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  Speaker 4: hold it in trust for them for their life? Do
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  Speaker 4: you know what it said? Do you know what it
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  Speaker 4: actually says? I just it's very important. Makes a huge difference. Okay,
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  Speaker 4: do you know what it says?
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  Speaker 5: Yeah, I'm not exactly what it says.
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  Speaker 4: So here's why it's a huge difference. If it says
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  Speaker 4: and it sounds like it probably does say that it
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  Speaker 4: would say to my kids if living, if not living,
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  Speaker 4: then their piece would go to either their kids or
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  Speaker 4: back to the ones that are still alive. And so
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  Speaker 4: if if it says pay it out, and you all
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  Speaker 4: four were living on the date of mom's death, then
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  Speaker 4: even though the deed has not changed from Mom's name,
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  Speaker 4: and this happens all the time, the law says that
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  Speaker 4: if it's paid, if it says give to my kids,
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  Speaker 4: then the moment mom died, you four kids became title
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  Speaker 4: owners to that property at that moment, even though there's
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  Speaker 4: no deed out of the estate to you. Okay, it's
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  Speaker 4: not required, but a lot of times people do prepare it.
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  Speaker 4: And so what that means is that all four of
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  Speaker 4: you kids actually own it right now. So if there
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  Speaker 4: was a lawsuit or someone got hurt on the property,
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  Speaker 4: they're going to sue all four of you. All four
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  Speaker 4: of you are legally obligated to maintain the property, pay
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  Speaker 4: the real estate tax bills, utilities, up keep maintenance.
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  Speaker 3: I mean, I assume you guys are all doing that now,
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  Speaker 3: Is that correct?
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  Speaker 5: It's sadly yift.
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  Speaker 4: Well again, that's where the sadly part comes in, Right,
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  Speaker 4: we left it to four people. Now what well, what
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  Speaker 4: if all four don't want it? Well, you guys could
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  Speaker 4: get together and say I want to You know, whoever
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  Speaker 4: wants it can buy out the interest of the ones
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  Speaker 4: who don't. If no one wants to do that, you
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  Speaker 4: can always force a sale by petitioning the court to
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  Speaker 4: partition the property, and the court will basically do the
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  Speaker 4: same things. They either sell it or buy each other out.
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  Speaker 4: And so you know, that's really where you are with that.
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  Speaker 4: But at this point it's part of your estate. So
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  Speaker 4: if you died, your estate would likely direct where your
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  Speaker 4: one quarter interest in that property goes, not necessarily to them,
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  Speaker 4: but to your kids or your spouse. So you really
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  Speaker 4: need to plan your estate and figure out what you
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  Speaker 4: want to do with it. But this is an arrangement
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  Speaker 4: that's probably not the way to go. Hope that helps
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  Speaker 4: a little, folks, Planning is always better. In this case,
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  Speaker 4: Mom didn't give away the asset. Mom died owning it,
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  Speaker 4: and there's benefits to that. The guide we're giving away
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  Speaker 4: is making the most of gifting assets. Sometimes we gift,
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  Speaker 4: sometimes we don't. As Chuck asked, do we give away
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  Speaker 4: real estate? Might not be a great item to give.
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  Speaker 4: More importantly, Hey, how do we give? Do we give outright?
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  Speaker 4: Do we give to irrevocable gifting trust for the kids?
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  Speaker 4: What if I want to give something away that's large
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  Speaker 4: and I want to still enjoy it? Well you can,
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  Speaker 4: but you got to use espousal lifetime access trust. Folks,
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  Speaker 4: So many income and gift tax and estate tax issues
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  Speaker 4: to think about when you gift, as well as how
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  Speaker 4: you gift. Learn if gifting is right for you and
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  Speaker 4: how to do it. Get the guide Making the Most
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  Speaker 4: of Gifting Assets eight six six eight four eight five
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  Speaker 4: six nine nine or Legal Exchange Show dot com again
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  Speaker 4: eight sixty six eight four eight five six nine nine
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  Speaker 4: or Legal Exchange Show dot Com.
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  Speaker 3: Todd got another one queued up for you.
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  Speaker 2: Here. We've got Tim in Pittsfield. Tim, you are on
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  Speaker 2: with Todd Lutski.
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  Speaker 6: Hi, I thank you for taking my calls.
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  Speaker 5: So we have My wife and I are both.
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  Speaker 6: Seventy and we have only we only have or five properties.
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  Speaker 6: Debt total are worth less than three million. Okay, So
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  Speaker 6: do we go about I'm just going by your information
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  Speaker 6: provided earlier, trusting it or I guess the will doesn't
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  Speaker 6: sound like the best thing either right now? Yeah, probably not,
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  Speaker 6: or do we sell them to them at a reduced rate.
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  Speaker 3: To your kids?
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  Speaker 5: Yes?
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  Speaker 4: So what other assets do you have add to the
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  Speaker 4: three million? The value of your investments, stocks, bonds, mutual funds,
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  Speaker 4: IRA accounts, banks, rough.
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  Speaker 6: Number, probably no more than three hundred to three point
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  Speaker 6: five million, So.
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  Speaker 4: Another another five hundred thousand, So the total estate is
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  Speaker 4: three point five yes, okay, so five hundred of of
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  Speaker 4: what we call money assets. Okay, So first and foremost,
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  Speaker 4: you mentioned selling it to your kids at a reduced value.
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  Speaker 4: First of all, why on earth would I even want
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  Speaker 4: to do that. I don't see any benefit unless there's
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  Speaker 4: some reason. I'm not seeing that your family, your kids
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  Speaker 4: need to own this real estate. Now, there's really no
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  Speaker 4: benefit in one gifting it to them, because I'm sure
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  Speaker 4: there's built in gain, meaning you bought it a while ago,
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  Speaker 4: rented it, depreciated it, so there's probably a lot of
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  Speaker 4: built in gain here. So so getting an asset by
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  Speaker 4: gifting it to kids out of the estate is not
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  Speaker 4: helpful because I'm trapping all the capital gain. It's not
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  Speaker 4: helpful for you because your entire estate is under four
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  Speaker 4: million dollars and with basic trust planning, we can eliminate
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  Speaker 4: your Massachusetts estate tax. You're already under the federal exemption,
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  Speaker 4: so you have no forty percent federal tax to deal with.
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  Speaker 4: And so if I gifted away, I save nothing on
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  Speaker 4: the tax front, but I trap a thirty percent capital gain.
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  Speaker 4: Whereas if I do trust planning and keep it for
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  Speaker 4: each other first and then the kids, now I can
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  Speaker 4: pay nothing on the estate tax front, and then by
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  Speaker 4: dying owning it, get a full step up in basis
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  Speaker 4: on these assets, which means that the fair market value
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  Speaker 4: will equal the basis for the children. So if they
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  Speaker 4: later sell it, there's zero capital gains tax. So now
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  Speaker 4: we're winning on the estate tax front and the capital
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  Speaker 4: gains tax front.
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  Speaker 3: Home run.
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  Speaker 4: Also, I've not exposed it to my kids creditors sooner
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  Speaker 4: than I need to. So selling it for a less
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  Speaker 4: amount or gifting it, I'm thinking, is a bad idea. Now,
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  Speaker 4: having said that, what should you do? Well you're seventy.
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  Speaker 4: If I want to make sure these assets go to
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  Speaker 4: my children later, I would set up two irrevocable medicaid trusts.
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  Speaker 4: Why because I want to make sure they go there.
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  Speaker 4: I want to make sure that if I keep them
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  Speaker 4: my whole life, that there's nothing that could interfere with
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  Speaker 4: them getting it, like taxes or like a nursing home
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  Speaker 4: or some other medical event that takes these assets because
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  Speaker 4: we have to sell to pay bills. So that's where
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  Speaker 4: I would set up the irrevocable trusts and you could
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  Speaker 4: remain in control of these assets. You can continue to
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  Speaker 4: rent them and collect your rent, which I know is important. Again,
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  Speaker 4: why would I want to give away my rent? This
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  Speaker 4: could be something I use in my retirement. And you
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  Speaker 4: can still control the ability to perhaps gift them away
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  Speaker 4: if you want to gift them away later, or sell
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  Speaker 4: them later and replace them with something else. So you
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  Speaker 4: will get to keep a lot of control over these assets,
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  Speaker 4: and at the same time eliminate the capital gains tax
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  Speaker 4: by getting a step up in basis, and eliminate the
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  Speaker 4: federal and state estate tax. So this is a great question, folks.
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  Speaker 4: Please don't just give away assets. Here not always the
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  Speaker 4: smartest tax play.
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  Speaker 2: Todd, appreciate you joining us today.
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  Speaker 3: Thank you so much for the time. Always a pleasure.
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