Latest / The Financial Exchange Show / Ask Todd: What are the benefits of a life estate?

Transcript

Ask Todd: What are the benefits of a life estate? · The Financial Exchange Show

• 0:00
  Speaker 1: This is Ask Todd on the Financial Exchange Radio network.
• 0:04
  Speaker 1: If you have an existing estate plan or in the
• 0:06
  Speaker 1: market for one, Todd Letsky is here to answer your
• 0:09
  Speaker 1: questions and help you plan for later life. Ask Todd
• 0:12
  Speaker 1: is presented by Cushing and Dolan, serving Massachusetts and New
• 0:15
  Speaker 1: England for more than thirty five years, helping families with
• 0:18
  Speaker 1: a state and tax planning, medicaid planning, and probate law.
• 0:22
  Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
• 0:27
  Speaker 2: As promised, we are now joined by the one and
• 0:30
  Speaker 2: only Todd Lutsky for Ask Todd. It's your chance to
• 0:33
  Speaker 2: ask Todd your questions about your estate plan and we
• 0:36
  Speaker 2: got the phone lines wide open for you to give
• 0:40
  Speaker 2: him a call.
• 0:41
  Speaker 3: Eight eight eight two zero five two two sixty three.
• 0:44
  Speaker 2: That is the number to call to ask Todd your
• 0:46
  Speaker 2: state planning questions live on air right now.
• 0:51
  Speaker 3: Usually get through two maybe three calls, so.
• 0:53
  Speaker 2: Get calling early and often in order to make sure
• 0:57
  Speaker 2: your call is taken. Here again, eight eight eight to
• 1:01
  Speaker 2: zero five two two sixty three is the number. One
• 1:05
  Speaker 2: more time. It is eight eight eight to zero five
• 1:09
  Speaker 2: two two six three. Mister Lutsky, how are you doing today?
• 1:13
  Speaker 3: I am never better. How are you good?
• 1:16
  Speaker 2: Trying to plan some some summer trips and stuff like that.
• 1:19
  Speaker 2: Oh yeah, wife and I are considering a trip to
• 1:22
  Speaker 2: Mount Everest. She wants to color her hair at the
• 1:26
  Speaker 2: top of it. Yeah, she's willing to die on that hill. Todd,
• 1:33
  Speaker 2: I want to talk a little bit about uh, life estates. Okay,
• 1:37
  Speaker 2: Let's say that I am someone who has reserved a
• 1:40
  Speaker 2: life estate in a property. Okay, and I end up
• 1:44
  Speaker 2: going into a nursing home, all right, but not just
• 1:48
  Speaker 2: a property on your home, my home on my home. Ahead,
• 1:51
  Speaker 2: what happens to my home in that case? As far
• 1:55
  Speaker 2: as leans against it, equity, you need to be used.
• 1:57
  Speaker 2: How does how do things work from that perspective?
• 2:00
  Speaker 4: So, as we've said before, there are two ways to
• 2:04
  Speaker 4: sort of do a life estate. A right way and
• 2:06
  Speaker 4: a wrong way, is what I like to say, But
• 2:08
  Speaker 4: I should say one is less bad and one is bad.
• 2:11
  Speaker 3: So the way to do it is in your example.
• 2:16
  Speaker 4: We're taking the house and we're putting it in the
• 2:19
  Speaker 4: hands of the children, and we're reserving the right to
• 2:22
  Speaker 4: live there, which is one way to do a life estate.
• 2:25
  Speaker 3: Sure, so there are benefits.
• 2:27
  Speaker 4: I don't want to make it sound like there's no
• 2:29
  Speaker 4: benefits to doing a life estate. There certainly is and
• 2:33
  Speaker 4: are benefits, one of which is what you said. Let's
• 2:36
  Speaker 4: say you put this arrangement together and you make it
• 2:40
  Speaker 4: that five years. Remember that that's that waiting period that
• 2:43
  Speaker 4: you really there's only a very few ways to ever
• 2:46
  Speaker 4: avoid that. But so for the most part, you're gonna
• 2:48
  Speaker 4: have to wait five years in order for it to
• 2:51
  Speaker 4: be protected from the nursing home. But if you set
• 2:53
  Speaker 4: it up and get beyond that waiting period, and in
• 2:57
  Speaker 4: your example, then to go to a long term care facility,
• 3:03
  Speaker 4: the house will be protected one hundred percent from the
• 3:05
  Speaker 4: nursing home.
• 3:06
  Speaker 2: What about on the other side of that transaction, what
• 3:09
  Speaker 2: happens if I've transferred the property to my kids, and
• 3:14
  Speaker 2: let's say that one of them runs into some kind
• 3:16
  Speaker 2: of legal situation where they have a creditor who's looking
• 3:20
  Speaker 2: for money from them, or let's say that you know,
• 3:25
  Speaker 2: they need liquidity because something went wrong in their business
• 3:27
  Speaker 2: and they need to sell that property. How do things
• 3:30
  Speaker 2: work if they run into financial trouble.
• 3:32
  Speaker 4: Yeah, I think it's a great question, because you've got
• 3:33
  Speaker 4: to look at a life estate from all angles, right
• 3:36
  Speaker 4: from all sides of this equation, and and the kids
• 3:40
  Speaker 4: side of this equation is where some of the problems
• 3:43
  Speaker 4: come in. While we just discussed a benefit, I think
• 3:46
  Speaker 4: some of the problems would be, you know it is
• 3:49
  Speaker 4: going to technically be exposed to that kid's creditors right away.
• 3:54
  Speaker 4: Why because they do own it. You made a completed
• 3:56
  Speaker 4: gift of a future interest. Now, good news for the
• 4:00
  Speaker 4: life tenant. The life tenant that they can't move against
• 4:05
  Speaker 4: the life tenant, so they will have that confirmed right
• 4:07
  Speaker 4: to live there. They won't lose the house to that creditor. However,
• 4:11
  Speaker 4: that child will have to deal with that creditor. Let's say,
• 4:14
  Speaker 4: for an example, it's a divorce. If it's a divorce,
• 4:17
  Speaker 4: at that moment, that child going through the divorce might
• 4:23
  Speaker 4: have to say to the soon to be ex spouse, Okay,
• 4:27
  Speaker 4: I'll tell you what. Here's the value of the home.
• 4:29
  Speaker 4: I'm going to keep the home to protect my mom,
• 4:32
  Speaker 4: and I'm going to pay you, you know the value,
• 4:35
  Speaker 4: your half of the value of that home, or just
• 4:38
  Speaker 4: allocate asset. So to me, it's still a problem for
• 4:41
  Speaker 4: the creditor. So I don't love it for that reason.
• 4:44
  Speaker 2: Talking with Todd Watski from the law firm of Cushing
• 4:46
  Speaker 2: and Dolan. If you've got a question to ask Todd,
• 4:49
  Speaker 2: this is your opportunity, live on air right now, still
• 4:52
  Speaker 2: room on the phone lines at eight eight eight two
• 4:55
  Speaker 2: zero five two two sixty three. That is the number
• 4:58
  Speaker 2: to call to ask your questions again, eight eight eight
• 5:02
  Speaker 2: to zero five two two sixty three. We're gonna take
• 5:06
  Speaker 2: a quick break here, but when we come back, it
• 5:09
  Speaker 2: is right to your questions with Todd.
• 5:11
  Speaker 3: That number one more time is.
• 5:13
  Speaker 2: Eight eight eight to zero five two two sixty three.
• 5:18
  Speaker 1: Ask Todd with Todd Letsky every Wednesday at ten thirty
• 5:21
  Speaker 1: only here on the Financial Exchange Radio Network. Todd Letsky
• 5:27
  Speaker 1: answers your questions about a state and elder life planning
• 5:30
  Speaker 1: every Wednesday at ten thirty right here on the Financial
• 5:33
  Speaker 1: Exchange Radio Network.
• 5:45
  Speaker 3: All right, let's get to your calls with Todd. Let's key.
• 5:49
  Speaker 2: First up, we've got Jimmy in Provincetown. Jimmy, what is
• 5:54
  Speaker 2: your question for Todd?
• 5:57
  Speaker 5: Hi? Todd? How you doing? Never be question in regards
• 6:01
  Speaker 5: to when we sell the property in the trust? Yeah,
• 6:06
  Speaker 5: the taxation? If you on the capitol game, would the
• 6:09
  Speaker 5: trust pay it or do would the beneficiary pay it
• 6:12
  Speaker 5: after the assets are distributed.
• 6:14
  Speaker 4: So so Jimmy remind me, just because there's lots of
• 6:18
  Speaker 4: Jimmy's are are you? Is this my trust that we
• 6:21
  Speaker 4: did or is it another person's irrevocable trust?
• 6:26
  Speaker 5: Well, we did one for my mother, and then when
• 6:28
  Speaker 5: she passed away, we did a similar one for me
• 6:33
  Speaker 5: and my brothers and sisters. So I'm the trustee and
• 6:37
  Speaker 5: my brothers and sisters, uh beneficiary.
• 6:39
  Speaker 4: And so okay, so what you're saying is you're my client. Yeah, okay,
• 6:44
  Speaker 4: I just needed to know that so that I can
• 6:47
  Speaker 4: you know, because then I know it's my trust. If
• 6:48
  Speaker 4: it was someone else's trust that I didn't draft, it
• 6:51
  Speaker 4: would be harder for me to answer the question. So
• 6:55
  Speaker 4: now that I can tell you that it's our trust,
• 6:58
  Speaker 4: and so your your portion of the property? Did you
• 7:03
  Speaker 4: you said your brothers and sisters inherited this property?
• 7:07
  Speaker 5: We all did, so, y'all?
• 7:10
  Speaker 3: Yeah, what percent do you own?
• 7:13
  Speaker 5: I have a forty percent interest and.
• 7:15
  Speaker 4: Your forty percent interest we put into an irrevocable trust
• 7:19
  Speaker 4: for you.
• 7:19
  Speaker 3: Correct.
• 7:21
  Speaker 5: I don't think so. I think it was just just
• 7:25
  Speaker 5: just don't I don't know if it was irreplicable or not. Oh,
• 7:28
  Speaker 5: so we can really do a flea trust like that?
• 7:31
  Speaker 4: Oh so again, Jim, In order for me to answer
• 7:34
  Speaker 4: the question, I kind of need to know what kind
• 7:37
  Speaker 4: of trust we did for you. Just hard for me
• 7:39
  Speaker 4: to remember, right, you know, off the top of my head.
• 7:41
  Speaker 4: So I'm going to give you two answers. If we
• 7:44
  Speaker 4: did an estate plan together, I can assure you that
• 7:47
  Speaker 4: I would have transferred your interest in the property into
• 7:51
  Speaker 4: a trust, okay, And and the ownership your only your interest,
• 7:56
  Speaker 4: though not not the other chill other siblings. I would
• 8:00
  Speaker 4: have transferred your interest into a trust. That trust would
• 8:04
  Speaker 4: have been either revocable or irrevocable, depending on what your
• 8:09
  Speaker 4: wishes were. So when we met, was one of your
• 8:12
  Speaker 4: wishes to protect assets from the nursing home in case
• 8:15
  Speaker 4: you got sick in the future.
• 8:18
  Speaker 5: I don't think we did a trust for me.
• 8:20
  Speaker 4: Oh so, then you're we're probably not a client then,
• 8:23
  Speaker 4: in other words, other than I did it for.
• 8:24
  Speaker 5: Your mom, right, you did it for my mom? Yeah?
• 8:28
  Speaker 4: Okay, so your mom passed and you got forty percent interest. Yeah,
• 8:32
  Speaker 4: so I'm trying to understand your question. So now you're
• 8:36
  Speaker 4: selling that property? Yeah, okay, so you you went I'm sorry,
• 8:41
  Speaker 4: would you say.
• 8:43
  Speaker 5: We're in the process of selling the property here on
• 8:45
  Speaker 5: the cave.
• 8:46
  Speaker 4: Right, So you and your siblings are selling the property yep.
• 8:50
  Speaker 4: And you and your siblings are signing any purchase in
• 8:54
  Speaker 4: sale agreement in your own name, correct, yes, okay, So
• 8:59
  Speaker 4: there's no true trust involved here at all, because I
• 9:01
  Speaker 4: thought in the beginning you said you were selling it
• 9:03
  Speaker 4: from a trust and I might have misheard that. So
• 9:07
  Speaker 4: you're actually just selling it from your own name, correct, Yeah, okay,
• 9:12
  Speaker 4: So the answer is on the date of your mom's passing.
• 9:16
  Speaker 4: That property was fully included in her estate for estate
• 9:20
  Speaker 4: tax purposes, So like, when did she pass She.
• 9:24
  Speaker 5: Passed in to sixteen, March fifteen to sixteen.
• 9:31
  Speaker 4: So of twenty of twenty twenty four, twenty twenty five.
• 9:38
  Speaker 5: She passed in twenty sixteen.
• 9:41
  Speaker 4: Oh, in twenty sixteen, okay, So if she passed in
• 9:44
  Speaker 4: twenty sixteen, now that was quite a while ago, so
• 9:47
  Speaker 4: I'm sure there's been some appreciation. But the basis, the
• 9:51
  Speaker 4: cost basis for you and your siblings will be whatever
• 9:55
  Speaker 4: the value of that property was on the date of
• 9:59
  Speaker 4: her death in twenty sixteen. So you've got to go
• 10:01
  Speaker 4: back and get a back dated appraisal for that find
• 10:05
  Speaker 4: out what it was worth, then that's your basis. Then
• 10:09
  Speaker 4: whatever it has grown to from that day, the difference
• 10:14
  Speaker 4: between what you sell it for today and what it
• 10:17
  Speaker 4: was worth in twenty sixteen, plus any capital improvements you
• 10:23
  Speaker 4: might have made or your siblings have made to the
• 10:26
  Speaker 4: property since twenty sixteen is your basis. So date of
• 10:31
  Speaker 4: death value plus improvements is basis minus what you sell
• 10:36
  Speaker 4: it for today capital gain. And if you don't live
• 10:40
  Speaker 4: there as your primary residence, you're not going to get
• 10:43
  Speaker 4: any capital gains exclusion. It'll just be the capital gains
• 10:46
  Speaker 4: tax associated with that. So you know, good news in
• 10:50
  Speaker 4: the sense that at least you got as much of
• 10:51
  Speaker 4: a basis step up as you possibly could have by
• 10:54
  Speaker 4: doing the planning, or that your mother did the planning.
• 10:57
  Speaker 4: It's just now a function of paying the gain on
• 10:59
  Speaker 4: the future growth. So hope that helps, and good luck
• 11:03
  Speaker 4: with the sale. So, folks, you know, that's a great
• 11:07
  Speaker 4: question because capital gains come up all the time when
• 11:10
  Speaker 4: we talk about life estates, and so if you've got
• 11:13
  Speaker 4: a life estate and you're wondering if you go to
• 11:16
  Speaker 4: sell it, what the tax ramifications are, really need to
• 11:19
  Speaker 4: get the guide right, because this is one of those
• 11:20
  Speaker 4: things where you're going to find out that there are
• 11:23
  Speaker 4: sometimes negative capital gains tax consequences associated with selling a
• 11:29
  Speaker 4: home in a life estate arrangement, especially when the remaindermen
• 11:33
  Speaker 4: are the children. This guide not only talks about those issues,
• 11:38
  Speaker 4: it talks about the two ways to create a life
• 11:40
  Speaker 4: estate and other gift tax, income tax, estate tax, creditor
• 11:47
  Speaker 4: issues associated with loss of control. Another question associated with
• 11:52
  Speaker 4: these life life estates. So if you got one, or
• 11:55
  Speaker 4: you're thinking about doing one, call and get the guide
• 11:58
  Speaker 4: and learn what you're getting into. Eight six six eight
• 12:01
  Speaker 4: four eight five six nine nine or Legal Exchange Show
• 12:05
  Speaker 4: dot com again eight six six eight four eight five
• 12:09
  Speaker 4: six nine nine or Legal Exchange Show dot com Todd.
• 12:14
  Speaker 2: Before the break, we were talking about potential downsides to
• 12:18
  Speaker 2: you know, kind of what you might see in a
• 12:21
  Speaker 2: life estate if things go wrong. We covered a couple
• 12:23
  Speaker 2: examples there. Huh, what other potential issues are there with
• 12:27
  Speaker 2: the use of life estates in a state plan? Is
• 12:31
  Speaker 2: kind of like a core piece of one.
• 12:33
  Speaker 4: Yeah, and I think maybe it's it's it's a great
• 12:36
  Speaker 4: follow up question really to Jimmy who just called, because
• 12:39
  Speaker 4: I think we probably should spend some time since he's
• 12:42
  Speaker 4: selling a piece of property, and I can kind of
• 12:44
  Speaker 4: compare what he did or what his mom did and
• 12:47
  Speaker 4: what we did for them versus a life estate situation.
• 12:51
  Speaker 4: So he's selling piece of property after mom passes. So
• 12:55
  Speaker 4: that's a little different. Full step up. No problem in
• 12:57
  Speaker 4: the gain world except for the future growth.
• 13:00
  Speaker 3: But if you're living.
• 13:01
  Speaker 4: Right, people set this stuff up and they could be
• 13:04
  Speaker 4: sixty five, you know, nine five years later they want
• 13:07
  Speaker 4: to say, you know, now I'm seventy and I want
• 13:09
  Speaker 4: to move to Florida. Oh well, I want to sell
• 13:11
  Speaker 4: my house. Sure they should be allowed to do that.
• 13:14
  Speaker 4: But if you gave the house to the kids and
• 13:18
  Speaker 4: reserved a life estate, here are some steps that you
• 13:21
  Speaker 4: have to go through in order to sell it. First,
• 13:24
  Speaker 4: you have to ask the kids okay, well I don't
• 13:27
  Speaker 4: want to have to do that. That's problem number one.
• 13:29
  Speaker 3: Number two.
• 13:30
  Speaker 4: Let's assume that they're nice kids and they say, yeah,
• 13:33
  Speaker 4: we're going to sell it. Now both people have to sign,
• 13:36
  Speaker 4: the children and the life tenant. Then we have to
• 13:39
  Speaker 4: go to an IRS table based on the life tenant's
• 13:42
  Speaker 4: age in the month in which the life tenant is selling,
• 13:47
  Speaker 4: find the applicable federal interest rate in effect, so that
• 13:50
  Speaker 4: we can determine what percentage value of the proceeds from
• 13:55
  Speaker 4: the sale get allocated to the life tenant and what
• 13:59
  Speaker 4: percentage proceeds from the sale get allocated to the children.
• 14:03
  Speaker 4: I can assure you the older you get, the smaller
• 14:07
  Speaker 4: the percentage proceeds of the sale will be to the
• 14:10
  Speaker 4: life tenant. So if you're seventy five when you're selling this,
• 14:14
  Speaker 4: you might only get twenty twenty five percent of the money.
• 14:17
  Speaker 4: So if you sell the house and you only get
• 14:19
  Speaker 4: twenty twenty five percent of the money, I suspect you
• 14:23
  Speaker 4: don't have enough money to buy your new house in Florida.
• 14:27
  Speaker 4: So now you need to ask the children to give
• 14:30
  Speaker 4: you back money that they got. Well, that's not a
• 14:33
  Speaker 4: good place to be. In addition, what about the income tax? Oh,
• 14:38
  Speaker 4: I forget that for a minute. The kids might have
• 14:39
  Speaker 4: a gift tax when they give back the money to
• 14:43
  Speaker 4: mom and dad if they give it back, So that's
• 14:46
  Speaker 4: a problem. But more importantly, what's the capital gains tax? Well,
• 14:50
  Speaker 4: the life tenant would get to a capital gains exclusion
• 14:54
  Speaker 4: two fifty if you're married. I'm sorry if you're single,
• 14:58
  Speaker 4: five hundred thousand if you're married. But the children don't
• 15:02
  Speaker 4: if they don't live there, they don't get a remainder interest,
• 15:04
  Speaker 4: or they don't get a capital gains exclusion, They're going
• 15:07
  Speaker 4: to have to pay higher capital gains tax than you
• 15:10
  Speaker 4: would if we got the whole capital gains exclusion for
• 15:13
  Speaker 4: mom and dad.
• 15:14
  Speaker 3: Folks. That's just one example of a life estate issue.
• 15:18
  Speaker 3: Mister Lutsky, thank you so much for joining us today.
• 15:20
  Speaker 3: Always a pleasure.
• 15:22
  Speaker 1: This has been Asked Odd on the Financial Exchange radio network.
• 15:26
  Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
• 15:29
  Speaker 1: and Dolan, serving Massachusetts and New England for more than
• 15:31
  Speaker 1: thirty years, helping families with the state and tax planning,
• 15:34
  Speaker 1: Medicaid planning, and probate law. Call eight hundred and three
• 15:37
  Speaker 1: nine three four thousand and one or visit Cushingdolan dot com.
• 15:41
  Speaker 1: The views expressed in this segment are solely those of
• 15:43
  Speaker 1: Cushing and Dolan Armstrong Advisor. He does not provide any
• 15:45
  Speaker 1: legal or tax advice. Please consult with your legal or
• 15:47
  Speaker 1: tax advisor on such matters. Cushing and Armstrong do not
• 15:50
  Speaker 1: endorse each other and are not affiliated