September 24, 2019 By

Tuesday’s need-to-know money news

Today’s top story: Hard-won tips from borrowers who got student loan forgiveness. Also in the news: Steering your upside-down car loan back to safety, FAFSA mistakes that can negatively affect your financial aid, and what to do first with an inheritance.

Hard-Won Tips From Borrowers Who Got Student Loan Forgiveness
It won’t be easy.

Is Your Car Loan Upside-Down? How to Steer Back to Safety
Getting back above water.

These FAFSA mistakes can negatively affect your financial aid
FAFSA applications open on October 1st.

What to Do First With an Inheritance
Making smart decisions during a difficult time.

Filed Under: Liz's Blog Tagged With: , , , , ,
July 29, 2019 By

Q&A: Keeping a bequest from doing harm

Dear Liz: I am leaving a good friend a bequest in my will. He receives government benefits, including disability, Supplemental Security Income and Medi-Cal (California’s version of Medicaid). I am beginning to be concerned that if he inherits the money, it could mess him up more than help him. Is there a way to leave someone like my friend a bequest without jeopardizing the various benefits they now receive?

Answer: You’ll want an attorney experienced in “special needs trusts” to help you put language into your estate plan that can help shelter this money and protect your friend’s benefits.

Your concern is well founded because a direct inheritance could cause him to lose income and health coverage. SSI and Medi-Cal are both “means tested” programs that require people to have less than $2,000 in assets. All too often, well-meaning friends and relatives leave direct bequests that have the unintended consequence of separating the recipients from vital services they need to survive.

Filed Under: Estate planning, Q&A Tagged With: , , ,
June 17, 2019 By

Q&A: When family balks at paying their fair share

Dear Liz: I inherited half a duplex from my parents. They were partners with my aunt and uncle. When alive, all parties shared expenses for the common areas. I rent out my half of the duplex while my aunt still lives in the other half. My cousins now control my aunt’s finances (she is 94 and in poor health). They refuse to reimburse me for common-area expenses such as painting the exterior (the paint was peeling, exposing the wood, and hadn’t been painted in more than 10 years) and repairing and updating the electrical panel, which had frayed and exposed wires that posed a fire hazard. The panel is on their half of the duplex but serves both units. These costs were about $15,000. What can I do? It’s not fair that I pay for everything when both owners benefit from the necessary repairs.

Answer: Your best hope may be to change your approach. Did you ask your cousins to help you pay for the repairs before you had them done, or only afterward? If they had no input into what was done or how, it’s understandable that they would balk when presented with half the bill.

Of course, they might have balked anyway, and that’s why owning property with other people can get tricky: They often don’t share your opinions about what needs to be done and how much to spend. Some prefer to defer maintenance and repairs indefinitely rather than shell out money to protect their investment. Others understand how important maintenance and repairs are but might want to do some of the work themselves to save money (although do-it-yourselfers shouldn’t attempt an electrical panel upgrade, obviously.)

So your frustration is understandable, but your options may be limited. If you can’t work something out with your cousins, your alternative may be to sell your half of the duplex, but that could require going to court to force a “partition” of the property. You should talk to an attorney familiar with the property laws in your state so you can get an idea of your options and their cost.

Filed Under: Inheritance, Q&A, Real Estate Tagged With: , , , ,
May 20, 2019 By

Q&A: Tax take on inherited house

Dear Liz: In a recent column, you quoted an attorney saying that if an inherited home in a trust is sold for its value at the date of death, the trust won’t owe capital gains. We sold our family’s house in 2007 within a month of my mother’s death and the government took half. Fortunately it was a really valuable house in Brentwood, but what are you talking about? I must be missing something.

Answer: If the government took half, then estate taxes — rather than capital gains taxes — probably triggered that hefty bill.

When your mother died, the estate tax exemption limit was much lower — $2 million, compared with the current $11.4 million. The top federal estate tax rate then was 45%, compared with 15% for capital gains.

Filed Under: Inheritance, Q&A, Real Estate Tagged With: , , , ,
March 25, 2019 By

Q&A: Rules for inherited property

Dear Liz: If someone owns an asset, such as a home or stocks, and passes away, the heirs can get a stepped-up cost basis. What if that same person also owned a second home, vacation property and rentals? Do those properties also get a stepped-up cost basis for the heirs?

Answer: Typically, yes. A step-up in cost basis means that the increase in value that happened during a person’s lifetime isn’t subject to capital gains taxes. Let’s say your mom bought a stock for $2 and it was worth $10 at her death. If she had sold it herself just before she died, or given it to you to sell, taxes would be owed on the $8 gain. If she bequeathed the stock to you in her will instead, you could sell it for $10 and owe no tax. If the price went up to $11 before you sold, you would owe tax on the $1 gain since her death.

The step up in basis also wipes out the need to recapture depreciation taken for rental and commercial properties, says tax expert Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting. (Depreciation is the loss in value over time due to age and wear and tear. Depreciation write-offs allow owners to deduct over several years the costs of buying and improving a rental or commercial property.) If your mom owned an apartment building and wrote off the depreciation, she would need to pay depreciation recapture taxes if she sold it. If you inherit the building, by contrast, you not only don’t owe taxes on the depreciation she took, but you can start depreciating the building all over again.

There’s an important exception to these general rules, however. If your mom placed the asset in an irrevocable trust before her death, it would be treated the same as a gift when you inherit it after her death, Luscombe says. You would get her basis, which means you would owe taxes on all the gain that happened during her lifetime plus any depreciation recapture taxes when you sold the asset.

Irrevocable trusts aren’t the same as the revocable living trusts people use to avoid probate, but are sometimes used when people are trying to get assets out of their estates to reduce future estate taxes. For the vast majority, though, estate taxes are no longer an issue, so irrevocable trusts can cause potentially unnecessary tax issues.

Filed Under: Inheritance, Q&A Tagged With: , , ,
February 18, 2019 By

Q&A: Heirs need a pro to sort our tax issues

Dear Liz: I know that when a person dies, their beneficiaries typically will inherit a home or other real estate at the current market value with no taxes owed on the appreciation that happened during the person’s lifetime. Does that hold true for stocks as well?

Answer: Usually, yes, but there are some exceptions.

If the stock is held inside a retirement account such as a 401(k) or IRA, and that retirement account is bequeathed to heirs, withdrawals will be subject to income tax. The same is true for investments held within variable annuities.

Inheritors also may owe capital gains taxes on a stock’s appreciation if the stock is held in certain trusts, such as a generation-skipping trust.

And even when no taxes are owed on the gain that happened during someone’s lifetime, there may be taxes due on the gain that happens after someone inherits the stock or other property, said Los Angeles estate planning attorney Burton Mitchell.

If you’re expecting an inheritance, you’d be smart to consult a tax pro so you understand the tax bill that may be attached.

Filed Under: Inheritance, Q&A, Taxes Tagged With: , , ,
November 19, 2018 By

Q&A: Many factors go into rental choice

Dear Liz: You recently answered a reader who didn’t want to keep and rent out the home she inherited with her brother. You mentioned that if he refused to buy her out, she could go to court to force a sale.

Another option is to hire a property management company to provide a buffer between the siblings but also between them and the tenants. The house will provide a healthy income to both bro and sis.

Answer: Actually, we don’t know that. While Mom-and-Pop landlords can make a tidy profit with single-family homes in some areas, just breaking even is hard in others. In many high-cost areas of the country, rents aren’t enough to cover the considerable costs of ownership, especially if the property still has a mortgage.

Even if it’s paid off, the house could need extensive repairs or be damaged by future tenants. Vacancy rates could be high in that area, and the property management company would still need to get paid. The siblings also will need additional liability insurance to protect against being sued.

The sister could get a much better return from investments that require a lot less from her. Mutual funds don’t call to tell you the roof is leaking or the furnace needs replacement.

The home could turn out to be immensely profitable and still be a bad investment for a sister who’s an unwilling business partner and who resents the brother who refused to buy her out when he had the opportunity.

Filed Under: Q&A, Real Estate Tagged With: , , ,
October 9, 2018 By

Q&A: Here’s why two siblings who inherited mom’s house should prepare for an ugly family feud

Dear Liz: My mother left her house to my brother and me. He wants to use it as a rental property. I have no interest in being a landlord or in ownership. He doesn’t want to buy me out, so I’d like to sell my half interest. What are the tax issues I need to prepare for, and does my brother need to sign any documents?

Answer: You should first prepare for an ugly family feud. If the property hasn’t been distributed yet, you’ll face a probate or trust contest over the house, says Jennifer Sawday, an estate planning attorney in Long Beach. If you’ve already inherited the home, you would need to go to court to file a real estate partition action. Either way, a court action typically forces a sale or arranges for your brother to buy you out before dividing the proceeds — minus all the attorneys’ fees, of course. (This is not a do-it-yourself situation, so you’ll both need to hire lawyers.)

That may be the best of bad options if your brother won’t see reason. Being a landlord involves considerable hassle and liability. You shouldn’t be forced into such a business — or any business — with a family member.

You can use the threat of legal action as a bargaining chip, since you both will net a lot less from your inheritance once the court gets involved. It makes much more sense for your brother to agree to a sale or get a mortgage to buy you out. Let’s hope he comes to that conclusion as soon as possible.

Filed Under: Estate planning, Inheritance, Q&A, Real Estate Tagged With: , ,
July 23, 2018 By

Q&A: Figuring the tax toll for an inherited house

Dear Liz: I inherited my home when my husband died. If I sell this house now at a current market value of around $900,000, what will be the basis of the capital gains tax? I think at the time of my husband’s death, the house’s market value was $400,000.

Answer: Based on your phrasing, we’ll assume your husband was the home’s sole owner when he died. In that case, the home got a new value for tax purposes of $400,000. That tax basis would be increased by the cost of any improvements you made while you owned it. When you sell, you subtract your basis from the sale price, minus the costs to sell the home, such as the real estate agent’s commission, to determine your gain. You can exempt up to $250,000 of the gain from taxation if it’s your primary residence and you’ve lived in the house at least two of the previous five years. You would owe capital gains taxes on the remaining profit.

Here’s how the math might work. Let’s say you made $50,000 in improvements to the home, raising your tax basis to $450,000. You pay your real estate agent a 6% commission on the $900,000 sale, or $54,000. The net sale price is then $846,000, from which you subtract $450,000 to get a gain of $396,000. If you meet the requirements for the home sale exclusion, you can subtract $250,000 from that amount, leaving $146,000 as the taxable gain.

If your husband was not the sole owner — if you owned the home together when he died — the tax treatment essentially would be the same if you lived in a community property state such as California. In other states, only his share of the home would receive the step-up in tax basis and you would retain the original tax basis for your share.

Filed Under: Inheritance, Q&A, Taxes Tagged With: , , , ,
July 16, 2018 By

Q&A: Mother-daughter drama and the financial ties that bind

Dear Liz: My mother is turning 92 this month. Due to a dispute, my mother amended her will last year and stated that my inheritance had to be used for a certain purpose.

My brother sent me the amendment and told me he will enforce my mother’s wishes. He also told me that I had to send a letter to him after my mother dies if I do not want anything from her trust. Is this accurate?

I want to put it in writing before my mother dies that I do not want a penny from her trust. I want to be completely estranged from my family and their control. Do I need a lawyer to do this, and do I have to wait until her death to put this in writing?

Answer: Consider showing the email to an experienced estate planning attorney to find out how much actual control your mother will have from beyond the grave. There may be workarounds that you (and your mother) haven’t considered.

If you decide you don’t want the money after her death, you can “disclaim” it in the letter your brother described. While it may seem more satisfying to make the point while your mother is still alive, you cannot force her to disinherit you any more than she can force you to take the money if you don’t want it.

Filed Under: Inheritance, Q&A Tagged With: , ,