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Ask Todd: Calculating the consequences of a life estate · 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 1: If you have an existing estate plan or in the
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  Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
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  Speaker 2: As promised, We're joined by the one and only Todd
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  Speaker 2: Lutsky from the law firm of Cushing and Dolan. We
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  Speaker 2: two to three of your calls, so to ask a
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  Speaker 2: question of Todd, get callin early again. That number is
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  Speaker 2: eight eight eight two zero five two two six three,
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  Speaker 2: And this is your chance to ask Todd your estate
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  Speaker 2: planning questions. Again. That number is eight eight eight two
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  Speaker 2: zero five two two six three. Mister Lutsky, how are
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  Speaker 2: you doing today?
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  Speaker 3: I am doing well. How about yourself?
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  Speaker 2: Pretty good? Yeah, I gotta tell you, I used to
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  Speaker 2: be against organ transplants.
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  Speaker 3: Yeah, I had a change of heart. That's good.
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  Speaker 1: Yeah, I like that.
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  Speaker 3: Yeah.
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  Speaker 2: Let's talk a little bit about life estates. What is
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  Speaker 2: a life estate.
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  Speaker 3: Well, it's it's actually a property ownership. It's a property right,
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  Speaker 3: is what it is. And people people oftentimes get confused
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  Speaker 3: by that. It's it's a nugget of ownership in your
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  Speaker 3: let's say your home for example, And that's really the
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  Speaker 3: one that you want to talk about. You want to
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  Speaker 3: do life estates primarily for your home or if you
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  Speaker 3: have like a multi family that's okay, and you're living
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  Speaker 3: in it, of course, And basically it equals X. I
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  Speaker 3: hate to do it X plus Y. So let's say
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  Speaker 3: you've got a million dollar piece of property. X plus
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  Speaker 3: Y equals you know, a million dollars. And so when
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  Speaker 3: you have a life estate, you have this right to
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  Speaker 3: live there and the right to collect income and the
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  Speaker 3: right to pay bills that would be X. The why
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  Speaker 3: part is the remainder interest that you gave away to somebody.
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  Speaker 3: And that's the key in a life of state in
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  Speaker 3: terms of how to calculate it. Right, it's whatever piece
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  Speaker 3: you give to someone else. Could be kids, could be
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  Speaker 3: nieces and nephews, could be an irrevocable medicaid trust, which
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  Speaker 3: I certainly like a lot better. So two ways to
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  Speaker 3: create it. One putting the remainder interest in the hands
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  Speaker 3: of the kids. Two putting the remainder interest in the
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  Speaker 3: hands of an irrevocable trust. So that's the two ways
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  Speaker 3: to create it, and both have an X and a Y.
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  Speaker 3: The X is always your life, your your nugget of
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  Speaker 3: ownership that you have, which is great. It allows you
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  Speaker 3: to live in your property, it allows you to keep
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  Speaker 3: your mortgages, et cetera.
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  Speaker 2: Talking with Todd Lotsky from the law firm of Cushing
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  Speaker 2: and Dolan to ask Todd a question live on air
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  Speaker 2: right now called eight eight eight to zero five two
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  Speaker 2: two six three. Still a little bit of room on
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  Speaker 2: the phone lines again, eight eight eight to zero five
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  Speaker 2: two two sixty three. That is the number to call
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  Speaker 2: to speak to Todd Lotsky about your estate planning questions.
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  Speaker 2: Let's go to a quick break here, but when we
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  Speaker 2: come back, it's going to be right to your questions
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  Speaker 2: with Todd again. That number is eight eight eight to
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  Speaker 2: zero five two two sixty three.
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  Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
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  Speaker 1: only here on the Financial Exchange Radio Network. You're listening
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  Speaker 2: Still got room on the phone lines at eight eight
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  Speaker 2: eight to zero five two two sixty three. So if
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  Speaker 2: you got to state planning questions for Todd, that number
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  Speaker 2: is eight eight eight to zero five two two sixty three.
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  Speaker 2: One more time, eight eight eight to zero five two
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  Speaker 2: two sixty three. Let's go to Jimmy from Provincetown. Jimmy,
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  Speaker 2: you are on with Todd Ltski. What's your question?
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  Speaker 4: Hi Todd, this is Jimmy.
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  Speaker 3: Hi Jim.
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  Speaker 4: I'm calling in regards to the irrevocable trust that you
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  Speaker 4: set up for my family back in two sixteen.
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  Speaker 3: Okay.
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  Speaker 4: We have the Cape property that is going to be
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  Speaker 4: sold probably this year, okay, and I was reading stuff
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  Speaker 4: about step up basis the property is sold from irrevocable trust.
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  Speaker 3: Yes, I can tell you one that that whatever you're
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  Speaker 3: reading has to be incorrect. The only way, and this
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  Speaker 3: is a great question for everybody, by the way, Jim,
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  Speaker 3: the only way somebody gets a step up in basis
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  Speaker 3: in pro party is to die owning it period. Okay.
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  Speaker 3: So if I have a piece of property that I
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  Speaker 3: bought for one hundred thousand dollars and today it's worth
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  Speaker 3: five hundred thousand dollars, the gain is four hundred thousand dollars,
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  Speaker 3: which is the difference between the cost basis and the
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  Speaker 3: fair market value. If I sell that property while I
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  Speaker 3: am alive, that four hundred thousand dollars remains a four
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  Speaker 3: hundred thousand dollars gain. Okay. If, on the other hand,
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  Speaker 3: I decide never to sell this property and I ultimately
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  Speaker 3: pass away and my children or anybody it doesn't have
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  Speaker 3: to be a child, but somebody inherits the property as
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  Speaker 3: a result of my passing. Then, and let's say on
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  Speaker 3: the date of my death, the value of that property
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  Speaker 3: is five hundred thousand dollars, then it's as if the
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  Speaker 3: basis in the hands of the person who inherit it
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  Speaker 3: is five hundred thousand dollars, so they can sell it
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  Speaker 3: and the gain is zero. But that is the only
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  Speaker 3: way to get a step up. So when you put
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  Speaker 3: your house in the irrevocable trust, thankfully you haven't died yet.
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  Speaker 3: So you gave the irrevocable trust your cost basis, so
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  Speaker 3: it's the same as if you were selling it not
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  Speaker 3: inside the trust. The gain will be exactly the same.
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  Speaker 3: So hopefully that's helpful for you. And that's for everybody,
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  Speaker 3: by the way, folks, So no problem. And by the way, Jim,
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  Speaker 3: you absolutely can sell it. You can buy another house.
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  Speaker 3: The trust is that flexible. You can move. Give the
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  Speaker 3: office a call though, if you want to be some
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  Speaker 3: representation on the sale, just to make sure you don't
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  Speaker 3: mess up the five year waiting period if you decide
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  Speaker 3: to buy and sell, folks. I hope that helps.
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  Speaker 1: Uh.
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  Speaker 3: Let me tell you though, that's important to understand because
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  Speaker 3: that also can be impacted with a calculate. The guide
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  Speaker 3: we're giving away is calculating the constant sequences of a
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  Speaker 3: life estate. What that means is many people in this
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  Speaker 3: case Jim didn't do that. He didn't put his house
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  Speaker 3: in a life estate, which I like. I'd much rather
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  Speaker 3: put it in the irrevocable trust. But people give away
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  Speaker 3: houses to children retain the right to live there. You
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  Speaker 3: need to understand the gift tax consequences that go with that,
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  Speaker 3: the estate tax consequences that go with that, the potential
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  Speaker 3: income tax consequences when you go to sell it or
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  Speaker 3: try to sell it. We talked about selling it for
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  Speaker 3: Jim from the trust, but can you sell it once
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  Speaker 3: it's in one of these life estates? Right? How much
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  Speaker 3: control you give up over it? What are the credit
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  Speaker 3: or implications to the children who become owners on the
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  Speaker 3: day you make the gift or set up the life estate.
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  Speaker 3: They're pros and cons folks. Get the guide. If you've
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  Speaker 3: done a life estate, get it so you can understand
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  Speaker 3: exactly what you've done and maybe you want to get
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  Speaker 3: out of it. Or two, if you're thinking about doing it,
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  Speaker 3: call and get the guide before you do it. Eight
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  Speaker 3: Legal Exchange Show dot com again eight six six eight
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  Speaker 3: four eight five six nine nine or Legal Exchange Show
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  Speaker 3: dot com.
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  Speaker 2: Todd, I got another one qued up for you here.
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  Speaker 2: Let's go to Rick in Chatham. Rick, what's your question
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  Speaker 2: for Tom Lutsky?
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  Speaker 5: Hey, Tod, If you have irrevocable trust and you have
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  Speaker 5: your house in it, and you have a life of space,
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  Speaker 5: they can stay there. The question is if you sell
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  Speaker 5: the house and down downsize, does that life of state,
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  Speaker 5: go with it or do you have to read balance
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  Speaker 5: it or whatever?
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  Speaker 3: Yeah, so great idea. So this is your primary residence.
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  Speaker 3: You're saying, that's in the in the trust we're talking about, correct, Okay,
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  Speaker 3: super How long ago did you set up that irrevocable
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  Speaker 3: trust and put the house in.
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  Speaker 5: We're just for about four years. We haven't met it
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  Speaker 5: all the way yet.
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  Speaker 3: Oh, but that's good, right, So four years is a
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  Speaker 3: good a good stretch. So that's in. Then you say
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  Speaker 3: we so I'm assuming that you're that you're married, correct, okay,
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  Speaker 3: super Bowl. So so here's the story. If you take
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  Speaker 3: that how if you want us and you heard Jim,
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  Speaker 3: can you sell it? Yes? Yes you can. So in
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  Speaker 3: your case, you're asking me again if you sell it, right,
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  Speaker 3: and you want to downsize. So here's what would happened. Out,
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  Speaker 3: would go the property in, would come money? But how
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  Speaker 3: much money? Right? And this is the issue with a
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  Speaker 3: life estate. Instead of putting the entire property in the
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  Speaker 3: trust in this case, in your case, you put what
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  Speaker 3: is known as the remainder interest in the trust and
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  Speaker 3: kept a nugget of ownership called the right to live there. Okay,
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  Speaker 3: that's the life of state. So let's call that X
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  Speaker 3: plus Why the remainder interest equals the value of the property. Okay,
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  Speaker 3: So how much is the house worth?
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  Speaker 5: About nine hundred?
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  Speaker 3: Ut Okay, so let's just call it nine hundred. Okay,
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  Speaker 3: So X plus Y equals nine hundred. How old are
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  Speaker 3: you guys?
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  Speaker 5: Sixty five?
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  Speaker 3: So let's just go with seventy for now. So what's
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  Speaker 3: gonna happen is you're gonna you're gonna be able to
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  Speaker 3: sell it. First and foremost, I don't know if your
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  Speaker 3: trust is a grand tour trust or not. Let's assume
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  Speaker 3: it is for income tax purposes, which simply means there
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  Speaker 3: won't be any adverse income tax consequences from the sale
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  Speaker 3: if it's a grand tour trust. So if that's the case,
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  Speaker 3: you will go to an let's say you're selling it
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  Speaker 3: this month, you will go to an IRS interest rate
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  Speaker 3: table called the applicable Federal rate, which is seventy five
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  Speaker 3: to twenty of the code, and they'll give you a
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  Speaker 3: rate I don't know what it is today, and then
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  Speaker 3: you take that percentage rate and you go find table
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  Speaker 3: s of the IRS code simple enough to pull up
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  Speaker 3: on the webs on the Google, and you will look
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  Speaker 3: up your age seventy year old. Go down the column
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  Speaker 3: till you find seventy, go across, and they will give
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  Speaker 3: you a percentage. So what is the percentage ownership interest
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  Speaker 3: in a life state for someone seventy years old? It's
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  Speaker 3: given right there. I'm going to just go on a
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  Speaker 3: limb here and say it's probably thirty percent. Thirty five percent. Okay,
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  Speaker 3: let's say thirty five percent. So what that means is
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  Speaker 3: sixty five percent represents the remainder interest which is in
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  Speaker 3: the trust. So when you go to sell it out,
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  Speaker 3: will go the real estate to the buyer, and the
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  Speaker 3: buyer's attorney will cut two checks, one check for sixty
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  Speaker 3: five percent of the proceeds approximately. Again I'm guessing on
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  Speaker 3: what that number is, and that will be deposited in
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  Speaker 3: the trust bank account that you will have to open
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  Speaker 3: up when when this is sold under an ID number
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  Speaker 3: that you get from the IRS regarding that trust, then
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  Speaker 3: there'll be another check from the buyer's attorney. Thirty five
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  Speaker 3: percent of the proceeds will go to you and your
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  Speaker 3: wife directly. Why, because you're the life tenant, so you
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  Speaker 3: do have that nugget of ownership. Represents a percentage of
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  Speaker 3: the proceeds and you put that in your pocket. Now,
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  Speaker 3: the good news is from an income tax standpoint, assuming
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  Speaker 3: this is a grand tour trust and you're married, you
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  Speaker 3: would get to retain your five hundred thousand dollars capital
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  Speaker 3: gains exclusion associated with the sale of your primary residence.
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  Speaker 3: So in English, that means the first five hundred thousand
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  Speaker 3: dollars of gain is not taxed to you. Guys, okay,
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  Speaker 3: And that wouldn't matter because even though a portion went
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  Speaker 3: to the trust and a portion went to you, if
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  Speaker 3: it's a grand tour trust, the entire gain ends up
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  Speaker 3: getting reported on your personal income tax return. It's a
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  Speaker 3: flow through from the trust to your personal return. So
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  Speaker 3: the gain that went to the trust goes to your return,
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  Speaker 3: and the gain that went to you as life tenants
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  Speaker 3: get picked up on your personal return, so no adverse
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  Speaker 3: tax consequence allocate the gain between the two. Of course.
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  Speaker 3: Now your next question would be I have no house
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  Speaker 3: because I sold it, so I guess I'm technically homeless. Well,
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  Speaker 3: I'm going to buy another house. You can do that.
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  Speaker 3: Out would go the money again, the trustee would sign
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  Speaker 3: all the paperwork distributing the money out to a seller,
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  Speaker 3: and the seller's attorney would prepare a deed putting the
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  Speaker 3: property back in the trust. Now, if you do it
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  Speaker 3: that way, there'll be no more life estate. So they
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  Speaker 3: think that's really your question, right, what's going to happen? Well,
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  Speaker 3: if I buy, if I use just the money in
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  Speaker 3: the trust to buy the new house, the new house
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  Speaker 3: is not going to have a life estate, not that
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  Speaker 3: it needs it. It doesn't. You still have all the
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  Speaker 3: benefits of living there, paying the bills, et cetera. And
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  Speaker 3: it would remain protected from the cost of long term care.
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  Speaker 3: Not yet, you still have one year to go. Oh,
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  Speaker 3: but the four year clock is not disrupted from this transaction.
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  Speaker 3: I think that's very important for you to note. So
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  Speaker 3: that four year clock remains four years. So one more
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  Speaker 3: year and the new house will be as protected as
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  Speaker 3: the old house would have been. What's the downside of
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  Speaker 3: a life estate In this arrangement, The thirty five percent
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  Speaker 3: of the proceeds that went to you are now included
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  Speaker 3: in your bank account and at risk all over again
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  Speaker 3: for the cost of nursing home care. That might not
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  Speaker 3: be a problem. You want the money, spend it, have
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  Speaker 3: a good time with it.
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  Speaker 1: Up to you.
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  Speaker 3: If lastly, you don't have enough money in the trust
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  Speaker 3: because thirty five percent didn't hit the trust account. You
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  Speaker 3: can contribute the money to the trust, start a new
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  Speaker 3: five year waiting period only on the contributed money, and
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  Speaker 3: then you add that to the money to buy the
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  Speaker 3: new property. Long winded answer, but I hope it covers everything.
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  Speaker 2: Mister Lutsky, Thank you so much for joining us today.
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  Speaker 3: Always a pleasure. Thank you.
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  Speaker 1: This has been Asked Odd on the Financial Exchange Radio network.
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  Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
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