Ask Liz Weston

Get smart with your money

Estate Planning

Q&A: Giving stock to your children

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Dear Liz: We plan to give our children some stock that we have had for several years. What is the tax consequence when they sell it? Is it the difference from the value when we gave it to them till they sell it, or the difference from the value when we purchased it?

Answer: If the stock is worth more the day you give it to them than it was worth when you bought it, you’ll be giving them your tax basis too.

Let’s imagine you bought the stock for $10 per share.

Say it’s worth $18 per share when you gift it. If they sell for $25, their capital gain would be $15 ($25 sale price minus your $10 basis). They will qualify for long-term capital gains rates since you’ve held the stock for more than a year.

If on the day you give the stock, it’s worth less than what you paid for it, then different rules apply. Let’s say the stock’s value has fallen to $5 per share when you gift it.

If your children later sell for more than your original basis of $10, then $10 is their basis. So if they sell for $12, their capital gain is $2.

If they sell it for less than $5 (the market value when you gave it), that $5 valuation becomes their basis. If they sell for $4, then, their capital loss would be $1 per share ($4 sale price minus $5 basis). The silver lining: Capital losses can be used to offset income and reduce taxes.

Finally, if they sell for an amount between the value at the date of the gift and your basis — so between $5 and $10 in our example — there will be no gain or loss to report.

If, however, you wait and bequeath the stock to them at your death, the shares would get a new tax basis at that point. If the stock is worth more than what you paid, your kids get that new, higher basis. So if it’s worth $25 on the day you die and they sell for $25, no capital gains taxes are owed. If it’s worth $5 when you die, though, the capital loss essentially evaporates. Your kids can’t use it to offset other income.

Q&A: Their kids are spendthrifts. How do parents protect them with a trust?

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Dear Liz: My wife (71) and I (68) have been diligent savers our entire lives. We have accumulated IRA assets of approximately $2 million along with a house and other assets. Our total estate is under $10 million. We have two adult children in their 20s who did not inherit the saving gene. My question is: Does a trust exist that would maintain the IRA’s tax-deferred status, make required minimum distributions to our kids and include appropriate spendthrift provisions? Also, would the distributions be based on our life expectancies or on theirs?

Answer: Yes, you can create a spendthrift trust and name it as the beneficiary of your IRAs. Your children could be named beneficiaries of the trust. Required minimum distributions for inherited IRAs would be based on the elder child’s life expectancy. Your children would not be able to “invade” or tap the principal.

A spendthrift trust would not only prevent your kids from blowing through any money left in the IRAs. It also would prevent creditors from getting the money in case of bankruptcy. In many states, inherited IRAs are vulnerable to creditor claims.

Here’s the thing, though: This is a question you should be asking your estate planning attorney. If you don’t have one, you need to get one. People with small, simple estates may be able to get away with do-it-yourself planning, but yours is neither small nor simple. Trying to save money by using software or forms just isn’t a good idea. Whatever money you save may be wasted when your estate plan goes awry in ways you didn’t foresee, because you’re not an estate planning expert.

Trusts that name IRAs as beneficiaries, for example, must have special language to accomplish what you want, said Jennifer Sawday, an estate planning attorney in Long Beach. Without the right language, the IRA custodian might liquidate the IRA instead. That would trigger the taxes and lump sum payouts you’re trying to avoid.

Q&A: Procrastination can mean estate-planning disaster

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Dear Liz: My husband and I own all our assets as joint tenants. Because we have no children, we did not want to rush into making a will. But for the past few years, my husband’s older sister has been pressuring him to write a will benefiting her 60-year-old daughter.

His sister has gone so far as to ask my husband to send her a notarized list of all our assets, including bank accounts. He’s declined but she does not take “no” for an answer. He no longer communicates with her. It is our wish to benefit only the organizations and institutions that we already support. Although family members and relatives will not be named in the will, I wonder if his sister or anyone else can still try to claim an inheritance.

Answer: If you don’t stop procrastinating, everything you own may be inherited by that pushy sister-in-law. So get a move on.

Your jointly owned assets should pass to the other spouse when one of you dies, but when the survivor dies the property would be distributed according to your state’s laws if you don’t have a will or other estate plan. The laws of intestate succession typically put any children first in line, followed by parents. If you don’t have kids and your parents are dead, then siblings usually inherit.

People who would have inherited in the absence of a will typically have the “standing” or legal ability to challenge a will. Given your sister-in-law’s extreme sense of entitlement, you should count on her doing so. You should enlist an experienced attorney to help set up a will that can survive such a challenge.

Q&A: When to consider creating a trust

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Dear Liz: You’ve written about trusts recently, but I’m confused. What are the benefits of creating a trust and putting all of your assets in it? Does it make sense for someone in their 30s and without any major assets, such as a house, to create a trust? Will I need to create a new trust if I get married?

Answer: There are many different types of trusts, but they’re typically designed to protect assets in one way or another. If you don’t have a lot of assets, you may not need a trust — at least not yet.

One of the most common types of trusts is a revocable living trust, which is designed to avoid the potential costs and delays of probate, the court process that otherwise follows death. In some states, probate is not that big a deal, while in others, including California, probate can be lengthy and expensive.

It’s often possible to avoid probate using beneficiary designations on financial accounts and, in some states, on property including vehicles and real estate. That may be sufficient for small estates or people just starting out. Once you have a home and some assets you’ll want to investigate whether a living trust makes sense.

Q&A: An inexpensive lawyer in the suburbs is fine for smaller estates

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Dear Liz: My wife and I have updated our will and trust every 10 years. So far we’ve been sorely disappointed. The local bar association recommended some attorneys, but they were relatively young, inexperienced, unable to answer a lot of our most basic questions, and produced documents that I could have created on my home computer. It seems as though the most experienced attorneys are downtown in tall office buildings with equally tall price tags while the suburbs get the new graduates, the generalists or the estate planning attorneys who didn’t make it in the big leagues. Can you recommend a referral source that will actually suggest someone who is experienced, specializes in estate planning and won’t require us to drive 40 miles to downtown?

Answer: The first question that must be asked is whether yours is a big-league estate.

If your joint estate is worth more than $22.4 million, the current estate tax exemption limit for a married couple, you probably should swallow your distaste and hire a skyscraper-based attorney. You’ll need expert help dealing with estate tax issues, and that doesn’t come cheap.

If your estate is not in the big leagues, you should still be able to hire a competent, experienced attorney if you do sufficient research beforehand. Understand that software will be drafting your plan, regardless of which lawyer you choose.

What you’re paying for is advice on the documents you need, assurance that those documents are prepared correctly and help getting the deeds for your real estate recorded for your trust, said Jennifer Sawday, an estate planning attorney in Long Beach. Good estate planning attorneys have seen the many ways an estate plan can go wrong so they can give the guidance needed to help you avoid disaster and create the outcomes you want.

Sawday said the best source of referrals maybe your CPA or tax preparer. Your tax pro has a good idea of your financial situation and probably has referred many other clients to good attorneys. Financial planners and attorneys who specialize in other areas can often recommend someone as well.

“Professionals don’t refer to other professionals time and time again who give bad service or otherwise generate unhappy clients,” Sawday said.

Interview two or three attorneys before you decide. You’ll typically have to pay a consultation fee, but you’ll have a much better idea of whether they can answer your questions to your satisfaction.

The suburbs, by the way, are precisely where you’re likely to find reasonably priced, competent attorneys, since they don’t have the same overhead costs as the skyscraper set.

Q&A: A ‘poor man’s trust’ may be a poor estate plan

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Dear Liz: I am 85 and my wife is 76. We have a house free of mortgage worth about $1 million. We have market investments above $4 million and life insurance of $1 million. We do not have a trust, just a will. Our financial advisor says that we do not need a trust because we have named both of our grown children as beneficiaries on all of our accounts and on the deed to our house. Please advise us if a trust is needed in our situation or if we are fine the way things are set up.

Answer: If your financial advisor is an estate-planning attorney, he or she may be correct. Otherwise, you’d be smart to seek out a lawyer experienced in these matters to review what you’ve done.

Naming beneficiaries on financial accounts, and on deeds in states that allow that, can allow those assets to pass to heirs without going through probate. So-called transfer-on-death accounts and deeds are sometimes called “the poor man’s trust.” You’re far from poor, though, and a living trust may be a better option for distributing your wealth because there are many ways the current arrangement could go wrong.

The surviving spouse, for example, could change the beneficiaries. You both may be of sound mind now, but there’s no guarantee you’ll remain so. Fraud experts can tell story after story of caregivers, relatives, friends, advisors and romantic interests persuading a vulnerable older person to change beneficiaries in favor of the interloper. A living trust that bypasses probate can include language to prevent your children from being completely disinherited.

Another potential problem: paying funeral costs and the expenses of settling the estate. If everything does go to the kids at the survivor’s death, the executor may have to go after them to return some of the money.

This column isn’t long enough to detail all the other ways transfer-on-death arrangements can misfire, so you’ll want to make an appointment with an experienced estate-planning attorney soon.