Latest / The Financial Exchange Show / Ask Todd: Life Estate vs Irrevocable Trust

Transcript

Ask Todd: Life Estate vs Irrevocable Trust · The Financial Exchange Show

• 0:01
  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
• 0:07
  Speaker 1: market for one, Todd Lutsky is here to answer your
• 0:09
  Speaker 1: questions and help you plan for a later life. Ask
• 0:12
  Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
• 0:15
  Speaker 1: New England for more than thirty five years, helping families
• 0:18
  Speaker 1: with 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're now joined by the one and only
• 0:30
  Speaker 2: Todd Lutsky from the law firm of Cushing and Dolan.
• 0:34
  Speaker 2: Segment is Asked Todd because this is your opportunity to
• 0:37
  Speaker 2: ask Todd your questions about your state plan or about
• 0:41
  Speaker 2: a family member's of state plan. So we got the
• 0:44
  Speaker 2: phone lines open at eight eight eight to zero five
• 0:48
  Speaker 2: two two six three. That number again is eight eight
• 0:51
  Speaker 2: eight to zero five two two sixty three. Usually only
• 0:54
  Speaker 2: enough time to get through two or three calls, so
• 0:56
  Speaker 2: get calling to make sure your question gets heard by Todd.
• 1:00
  Speaker 2: Eight eight eight to zero five two two six three.
• 1:05
  Speaker 2: That number again 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 doing great, and I'm gonna ask you, Yeah,
• 1:17
  Speaker 3: how are you doing? I'm good?
• 1:18
  Speaker 2: Oh yeah, I just I just took on a new role,
• 1:21
  Speaker 2: actually a new role. It's a it's a pretty senior
• 1:24
  Speaker 2: position at old McDonald's farm. Oh yeah, I'm the cieio.
• 1:28
  Speaker 2: Oh yeah, that's good. Yeah, it's a new role. It's uh,
• 1:31
  Speaker 2: it's pretty exciting stuff for me, Todd. I want to
• 1:33
  Speaker 2: talk to you a little bit about a comparison of
• 1:38
  Speaker 2: life estates versus irrevocable trust when it comes to you know,
• 1:44
  Speaker 2: give me I guess pros of life estates versus irrevocable trusts? First,
• 1:48
  Speaker 2: what are the advantages that a life estate confers versus
• 1:52
  Speaker 2: an irvocable trust?
• 1:53
  Speaker 3: So when you compare the two, I mean, I'm ultimately
• 1:56
  Speaker 3: going to lean towards there being almost no comparison.
• 1:59
  Speaker 2: I don't want to hear that right now.
• 2:01
  Speaker 3: I know.
• 2:03
  Speaker 2: I'll give you the what's the good of the life
• 2:06
  Speaker 2: estate relative to the irrevocable trust?
• 2:08
  Speaker 3: So if you have a life estate, right, and by
• 2:11
  Speaker 3: the way, I'm going to explain it the way most
• 2:13
  Speaker 3: people create it, because there's two ways to do it,
• 2:16
  Speaker 3: but most people will create a life estate where they've
• 2:19
  Speaker 3: taken their house and they've given it to the kids,
• 2:23
  Speaker 3: and they've reserved the right to live there. Let's just
• 2:26
  Speaker 3: say that. So if you're listening, folks, and you've done this,
• 2:28
  Speaker 3: you know you've done it, you know who you are.
• 2:31
  Speaker 3: So now you say, what have I done? What are
• 2:34
  Speaker 3: the pros? He wants me to stick with the pros
• 2:36
  Speaker 3: for a minute, the pros of doing that which don't
• 2:39
  Speaker 3: involve the irrevocable trust at all. In this arrangement, you
• 2:43
  Speaker 3: will have started a five year waiting period, and in
• 2:46
  Speaker 3: five years, if it's on your house, please don't do
• 2:49
  Speaker 3: a life estate on some other property, like a rental
• 2:52
  Speaker 3: or something. Why Well, because it's not if it's not
• 2:55
  Speaker 3: your primary residence and you get sick and go to
• 2:58
  Speaker 3: the nursing home, and then the value associated with your
• 3:03
  Speaker 3: life interest remains at risk for the nursing home. But
• 3:08
  Speaker 3: if it's your primary residence, then the value associated with
• 3:12
  Speaker 3: the life estate is not at risk because the primary
• 3:17
  Speaker 3: residence is a special asset that if you check a
• 3:21
  Speaker 3: box and say I tend to return home, they'll make
• 3:23
  Speaker 3: it non countable, so it still has the value same
• 3:26
  Speaker 3: as if you did it with another building. But the
• 3:29
  Speaker 3: difference is because it's this special asset, it will be
• 3:33
  Speaker 3: non countable when you're applying for medicaid. Okay, So now
• 3:37
  Speaker 3: we've got the life estate, and I know that I've
• 3:40
  Speaker 3: started my five year waiting period, and in five years
• 3:44
  Speaker 3: I can feel comfortable that my entire house, not just
• 3:48
  Speaker 3: a life estate, the entire house is protected from the
• 3:51
  Speaker 3: cost of long term care. Well, that's a pretty good thing,
• 3:54
  Speaker 3: I would think. Second thing, the good news, if there
• 3:58
  Speaker 3: is any is it's probate. So when I die, right
• 4:02
  Speaker 3: when you die, if you have a life estate interest,
• 4:04
  Speaker 3: the property just poof magically goes away and the remainderman,
• 4:09
  Speaker 3: the kids, will now be the one hundred percent owner.
• 4:12
  Speaker 3: Well that's that's also helpful, I would think. And three,
• 4:16
  Speaker 3: and maybe this is the last benefit is when you
• 4:20
  Speaker 3: pass away, had you never sold the property, which is
• 4:22
  Speaker 3: a whole nother problem, but we won't talk about that now.
• 4:26
  Speaker 3: When I pass away, the full value, not just the
• 4:29
  Speaker 3: value of the life estate, but the full value of
• 4:32
  Speaker 3: the property will be pulled back in to my gross estate,
• 4:37
  Speaker 3: not my probate estate, causing there to be a full
• 4:40
  Speaker 3: step up in basis for capital gains tax purposes. So
• 4:44
  Speaker 3: when the kids who now own the property because a
• 4:47
  Speaker 3: life estate vanished on my death, they have it with
• 4:51
  Speaker 3: a brand new basis equal to fair market value. So
• 4:54
  Speaker 3: if they sell it shortly after my death, there would
• 4:58
  Speaker 3: be no capital gains ste actually paid, so that that
• 5:01
  Speaker 3: also was a pretty good benefit.
• 5:03
  Speaker 2: Talking with Todd Lutsky from Cushing and Dolan. Still room
• 5:06
  Speaker 2: on the phone lines at eight eight eight to zero
• 5:09
  Speaker 2: five two two sixty three. That is the number to
• 5:11
  Speaker 2: call to ask Todd your estate planning questions live on
• 5:15
  Speaker 2: air right now eight eight eight to zero five two
• 5:20
  Speaker 2: two six three. We're gonna take a quick break here,
• 5:22
  Speaker 2: but when we come back, we are gonna get to
• 5:25
  Speaker 2: your questions with Todd. Eight eight eight to zero five
• 5:30
  Speaker 2: two two six three is the number. One more time,
• 5:33
  Speaker 2: call Todd right now at eight eight eight to zero
• 5:36
  Speaker 2: five two two six three.
• 5:39
  Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
• 5:43
  Speaker 1: only here on the Financial Exchange Radio Network. You're listening
• 5:49
  Speaker 1: to Ask Todd with Todd Lutsky on the Financial Exchange
• 5:53
  Speaker 1: Radio Network.
• 6:01
  Speaker 2: Still a bit of room on the phone line, So
• 6:03
  Speaker 2: if you got a question for Todd eight eight eight
• 6:06
  Speaker 2: two zero five two two six three. Got room for
• 6:09
  Speaker 2: one more if anyone's interested. Eight eight eight two zero
• 6:13
  Speaker 2: five two two sixty three is the number to call
• 6:15
  Speaker 2: to ask Todd your state planning questions. We go now
• 6:18
  Speaker 2: to John in Amesbury. John, what is your question for Todd? Letsky?
• 6:24
  Speaker 4: Okay? Well, I have a home and I have a
• 6:26
  Speaker 4: camp in New Hampshire. The home I plan on selling,
• 6:30
  Speaker 4: let's stay within the next two years, maybe longer. But
• 6:34
  Speaker 4: the camp I would like to put in a you know,
• 6:38
  Speaker 4: irrevocable trust and give it give it to the kids.
• 6:42
  Speaker 4: Is there is there a problem, you know, decision in
• 6:44
  Speaker 4: case anything happened and I needed to go into the nursing.
• 6:47
  Speaker 4: Is there a problem with that? Because I imagine it is
• 6:50
  Speaker 4: not considered my primary resident right now. But once I
• 6:54
  Speaker 4: sell the house, I plan on moving into that.
• 6:58
  Speaker 3: So a couple of questions, John, are you married?
• 7:01
  Speaker 1: Yes?
• 7:01
  Speaker 3: Okay? So I would tell you first and foremost one, Yes,
• 7:07
  Speaker 3: you can put the camp into an irrevocable trust. When
• 7:11
  Speaker 3: I was discussing earlier the life estate, that was just
• 7:15
  Speaker 3: how it works with a life estate for your home, right,
• 7:18
  Speaker 3: I would just put the whole camp in. I would
• 7:20
  Speaker 3: even put your whole home in and not reserve a
• 7:22
  Speaker 3: life state. You don't need to reserve a life state.
• 7:25
  Speaker 3: In fact, the life estates are not something that I
• 7:27
  Speaker 3: do very often. They're just done sometimes right. Generally, you
• 7:33
  Speaker 3: don't even need to reserve one. Just put the whole
• 7:36
  Speaker 3: darn property. And I like that a whole lot better
• 7:40
  Speaker 3: than doing a life estate at all. And so let's
• 7:44
  Speaker 3: first talk a minute about your home. I mean, the
• 7:47
  Speaker 3: home is a valuable asset. It's worth some money if
• 7:49
  Speaker 3: you sell it. There's no reason not to put the
• 7:52
  Speaker 3: home in if protecting either the home or the future
• 7:57
  Speaker 3: money from the sale of the home from probate and
• 8:01
  Speaker 3: taxes and nursing homes is on your mind, just like
• 8:06
  Speaker 3: with the camp in New Hampshire. So both of those
• 8:10
  Speaker 3: can go into an irrevocable trust. Depending on how much
• 8:13
  Speaker 3: you're worth. We might need one for husband and one
• 8:15
  Speaker 3: for wife, or we can just do you know, just
• 8:19
  Speaker 3: do one if the estate is under like two million dollars.
• 8:23
  Speaker 3: So that's the Massachusetts exemption amount. Now why I say
• 8:28
  Speaker 3: that is because a lot of people don't understand that
• 8:32
  Speaker 3: irrevocable trust, and so they think I'm putting my house
• 8:35
  Speaker 3: in the irrevocable trust, and I can't sell it in
• 8:37
  Speaker 3: two years or three years or four years whenever you
• 8:39
  Speaker 3: want to sell it. That's incorrect. You can sell it
• 8:42
  Speaker 3: any time you want to sell it. In fact, you
• 8:44
  Speaker 3: direct the sale and the trust actually does the selling.
• 8:48
  Speaker 3: So what would happen is the house would go out
• 8:51
  Speaker 3: and the money would come in. And we make these
• 8:54
  Speaker 3: trusts grant or trusts for income tax purposes, so you
• 8:57
  Speaker 3: still get your same capital gains exclusion associated with the
• 9:02
  Speaker 3: sale selling your primary residence. And that's why I asked
• 9:04
  Speaker 3: you if you're married, the first five hundred thousand dollars
• 9:08
  Speaker 3: of gain not proceeds gain is tax free, even if
• 9:14
  Speaker 3: it's owned inside this irrevocable trust. So by putting it in,
• 9:20
  Speaker 3: you start your five year waiting period. And even if
• 9:22
  Speaker 3: you sell it three years from now down the road
• 9:25
  Speaker 3: because you're ready to move up to New Hampshire and
• 9:27
  Speaker 3: maybe move into the camp, no problem. The money is
• 9:33
  Speaker 3: now in the trust protected. And I think most importantly
• 9:36
  Speaker 3: what people don't realize is you did not reset that
• 9:41
  Speaker 3: five year waiting period. So now the money that's in
• 9:44
  Speaker 3: the trust will be protected in two more years. So
• 9:47
  Speaker 3: if I sold it in three the money's protected in
• 9:50
  Speaker 3: two more years, so wonderful flexibility for you. And then
• 9:55
  Speaker 3: you move into the main the camp in New Hampshire
• 9:57
  Speaker 3: rather and meanwhile that's been sitting in the trust for
• 10:01
  Speaker 3: three years, and two more years the camp will be
• 10:04
  Speaker 3: protected and then you can live in the camp. You
• 10:06
  Speaker 3: can you know, run the camp. You can collect the
• 10:09
  Speaker 3: revenue the income from the camp and live out your life.
• 10:12
  Speaker 3: That's fine. And if you're in New Hampshire you don't
• 10:14
  Speaker 3: even have to worry about the Massachusetts state tax at
• 10:16
  Speaker 3: the time. So I think you're on the right track here, John,
• 10:20
  Speaker 3: I would get some guidance. I think the irrevocable trust
• 10:23
  Speaker 3: is the way to go for you and your family,
• 10:25
  Speaker 3: and I think it's going to help you with not
• 10:27
  Speaker 3: only taxes, probate and protection from the nursing home and
• 10:31
  Speaker 3: lastly get it to your family. I think the way
• 10:34
  Speaker 3: you want it to get there, you can control it
• 10:36
  Speaker 3: even after you're gone. So folks, great idea, John on
• 10:39
  Speaker 3: that when. I hope that helps a lot of people
• 10:41
  Speaker 3: in their thinking because that's an irrevocable trust discussion. But
• 10:46
  Speaker 3: the guide we're giving away is all about life estates right,
• 10:49
  Speaker 3: and again this is where people think a shortcut might
• 10:54
  Speaker 3: be a better way to do the to do your
• 10:58
  Speaker 3: state planning right. Oh, it's quicker, it's faster, it's cheaper,
• 11:00
  Speaker 3: it's easier. I don't think it's any of those, quite frankly,
• 11:04
  Speaker 3: but people do it. So if you've done a life
• 11:07
  Speaker 3: estate and you want to really understand what you've did,
• 11:10
  Speaker 3: get the guide. If you've not done a life estate
• 11:13
  Speaker 3: and you're thinking of either giving away your house completely
• 11:16
  Speaker 3: or setting up a life estate by giving it to
• 11:19
  Speaker 3: your children, get the guide. And also it explains how
• 11:22
  Speaker 3: to set up a life estate using a trust, which
• 11:25
  Speaker 3: is better or I should say, less bad than the
• 11:27
  Speaker 3: first approach. There's tax issues, there's control issues. Get the
• 11:32
  Speaker 3: guide eight six six eight four eight five six nine
• 11:36
  Speaker 3: nine or Legal Exchange Show dot com again eight six
• 11:40
  Speaker 3: six eight four eight five six nine nine or Legal
• 11:44
  Speaker 3: Exchange Show dot com.
• 11:46
  Speaker 2: Todd talking about taxes as it relates to the use
• 11:50
  Speaker 2: of an irrevocable trust. How does an irrevocable trust impact
• 11:53
  Speaker 2: income taxes on a yearly basis?
• 11:55
  Speaker 3: Yeah, And I think that's important because we kind of
• 11:57
  Speaker 3: talked a little bit about that. When John called right,
• 12:00
  Speaker 3: it was that idea of well, you know, I've got
• 12:02
  Speaker 3: my house and I might not want to put it
• 12:04
  Speaker 3: in the trust because I'm going to be selling it. Folks,
• 12:07
  Speaker 3: no reason not to do that. And if one of
• 12:09
  Speaker 3: the reasons you were thinking was taxes, that's incorrect because
• 12:15
  Speaker 3: these trusts are grant or trusts, which in English means you,
• 12:21
  Speaker 3: mom and dads of the world are John's of the
• 12:23
  Speaker 3: world are the owner for income tax purposes. So what
• 12:27
  Speaker 3: that means is the tax the trusts are income tax neutral.
• 12:33
  Speaker 3: Let me give you an example. Let's say we put
• 12:36
  Speaker 3: into the trust, you know, a million dollar investment portfolio
• 12:41
  Speaker 3: and a rental property. Well, that's going to be kicking
• 12:45
  Speaker 3: out a lot of income rent interest dividends, right. Well,
• 12:48
  Speaker 3: every year we're going to have to do something right
• 12:50
  Speaker 3: from a tax perspective, and in fact, we're coming up
• 12:53
  Speaker 3: on tax season, so everybody who's got one of these
• 12:55
  Speaker 3: needs to think about this. All the income that is
• 12:58
  Speaker 3: generated by that trust is going to be reported on
• 13:02
  Speaker 3: a Form ten to forty one. It's an income tax return.
• 13:04
  Speaker 3: So I guess answer your question. The only issue is
• 13:07
  Speaker 3: with these trusts, you do have to file an extra return.
• 13:10
  Speaker 3: That's about the biggest downside because there's zero tax due
• 13:14
  Speaker 3: at the trust level, everything will just flow out and
• 13:17
  Speaker 3: be picked up on your personal income tax return and
• 13:21
  Speaker 3: you pay the same tax.
• 13:23
  Speaker 2: What about when you die, And what I mean by
• 13:27
  Speaker 2: that is normally person passes away assets that are owned
• 13:32
  Speaker 2: by them in after tax accounts or assets that are
• 13:34
  Speaker 2: you know, real estate, whatever it is, receives a step
• 13:37
  Speaker 2: up in cost basis to the date of their passing.
• 13:40
  Speaker 2: If an asset is owned by one of these irrevocable trusts,
• 13:45
  Speaker 2: does that still happen?
• 13:46
  Speaker 3: And that is very important because a lot of assets
• 13:50
  Speaker 3: that are in there have grown over time. Lots of
• 13:52
  Speaker 3: times people do put their houses in that they might
• 13:55
  Speaker 3: have bought forty years ago, put that vacation property in
• 13:58
  Speaker 3: that has really spiked in value. You so very important
• 14:01
  Speaker 3: that you get to step up. And many people, even
• 14:03
  Speaker 3: accountants that read these right off the bat, their first
• 14:06
  Speaker 3: question is, oh, since it's an irrevocable trust, did you
• 14:09
  Speaker 3: make a gift? Is it not going to be included
• 14:11
  Speaker 3: in your state? Are you not going to get this
• 14:13
  Speaker 3: step up in basis yea. The quick answer is these
• 14:16
  Speaker 3: trusts are designed to cause the gift, to cause the
• 14:19
  Speaker 3: transfer to be included in the that you transfer to
• 14:22
  Speaker 3: the trust is an incomplete gift for gift tax purposes,
• 14:27
  Speaker 3: which means you don't have to file a gift tax return.
• 14:30
  Speaker 3: And number two, because you've retained an income interest for life,
• 14:34
  Speaker 3: the right to live there, the right to collect income interest.
• 14:38
  Speaker 3: It's fully included in your gross estate, but not your
• 14:43
  Speaker 3: probate estate, so you avoid the probate. But the inclusion
• 14:47
  Speaker 3: allows the asset to get a full step up in basis,
• 14:51
  Speaker 3: just like if you had died owning it in your
• 14:53
  Speaker 3: own name.
• 14:55
  Speaker 2: Todd Letskey, I appreciate you joining us today. Thank you
• 14:57
  Speaker 2: so much for the time.
• 14:58
  Speaker 3: It's always my pleasure. Thank you.
• 15:01
  Speaker 1: This has been Aske Todd on the Financial Exchange Radio network.
• 15:05
  Speaker 1: Ask Todd with Todd Lutsky has been presented by Cushing
• 15:08
  Speaker 1: and Dolan, serving Massachusetts and New England for more than
• 15:10
  Speaker 1: thirty years, helping families with the state and tax planning,
• 15:13
  Speaker 1: Medicaid planning, and probate law. Call eight hundred three nine
• 15:16
  Speaker 1: three four thousand and one or visit Cushingdolan dot com.
• 15:20
  Speaker 1: The views expressed in this segment are solely those of
• 15:22
  Speaker 1: Cushing and Dolan. Armstrong Advisory does not provide any legal
• 15:25
  Speaker 1: or tax advice. Please consult with your illegal or tax
• 15:27
  Speaker 1: advisor on such matters. Cushing and Armstrong do not endorse
• 15:29
  Speaker 1: each other and are not affiliated