The Vacation Home: Uniting the Family or Tearing It Apart?

Inheriting a vacation home with your siblings can be a great thing or it can cause huge problems within the family. Planning ahead can help prevent sibling disagreements. 

When siblings co-own property and one sibling wants to sell, that sibling can demand to be bought out. If the other siblings can't come up with the money to buy out the sibling, the sibling who wants out can force the sale of the house. This situation is not at all unusual and, unfortunately, can create a lot of hurt feelings. One owner has no interest in the property, while another has strong ties to it but can't afford to buy out the other owner or owners.

What different family members want can depend on many circumstances, such as whether they live near the vacation house or across the country from it, whether they have another vacation home of their own, whether or not they need the money, and even whether they have fond childhood memories of spending summers at the house.

The question for owners of vacation homes in planning their estates is the vision they have for the property. Do they see the property as binding their family together for generations to come as they continue to vacation together? Or are they more concerned about the issue of equity in that some children are unlikely to ever use the property while others may use it heavily? There is no right or wrong answer--just a question of the parents' values and goals.

The following are two estate planning solutions that are commonly used with regard to vacation homes: 

• Direct that the property be sold. Parents can direct that the property be sold within a certain amount of time -- often a year -- after the surviving parent's death. Often, the children are given a right to purchase the property at a bit less than fair market value, called a 'right of first refusal.' If none of the children exercises this right by the deadline, the property is put on the market. This solution has the advantage of finality and equity. Each child gets his or her share and is not tied to the other children for years to come. 

• Put the property in a trust. Usually, one or two family members are named trustees to manage the property for the benefit of all children and grandchildren. They can assess appropriate charges for use to cover the cost of upkeep and repairs (or the parent can leave money in trust for this purpose). This preserves the house for future generations. It also avoids probate. An irrevocable trust can also protect the property if the parents require nursing home care and must apply for Medicaid coverage.

• Proposition 19 should also be a consideration as a second home that is transferred from parent to child is subject to property tax reassessment in California.

In short, there is no right or wrong answer. But a plan is almost always better than no plan. Contact your attorney to create a plan that works for your family. There is no guarantee that all heirs will be happy with whatever decision is made. But in most cases, they will accept what their parents or grandparents decided to do with their property. And in terms of family harmony, it's often better that any anger be directed towards the parents who are no longer there than towards siblings who are still around.

 

 

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Elise Lampert, Esq.

Law Office of Elise Lampert

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com

Senators Propose Sweeping Changes to the Taxation of Estates and Inheritance Gains

 

Senators Propose Sweeping Changes to the Taxation of Estates and Inherited Gains

Vermont senator Bernie Sanders (D) has introduced legislation that would require more estates to pay estate tax and that raises the amounts they would pay. Another proposed law would eliminate the step-up in basis that inherited assets currently enjoy.  

Taken together, the changes would “rock” the estate planning world, according to a leading attorney. 

Under Sanders’ For the 99.5 Percent Act, the estate tax exemption would be reduced from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. Any estate that is valued at under the exemption amount will not pay any federal estate taxes, while those exceeding the exemption threshold would be subject to a progressively increasing tax rate. Estates valued between $3.5 million and $10 million would be taxed at 45 percent, estates valued between $10 million and $50 million at 50 percent, estates valued at $50 million to $1 billion at 55 percent, and estates over $1 billion at 65 percent. This would be a significant increase from the current tax rate of 40 percent for all estates over the exemption. 

The Act would also slash the lifetime gift tax exemption from $11.7 million to $1 million, although individuals would still be able to give away $15,000 a year without the gift counting toward the lifetime limit. 

A group of senators, including Sen. Sanders, Sen. Elizabeth Warren (D-Mass.), and Sen. Cory Booker (D-N.J.), has also introduced the Sensible Tax and Equity Promotion (STEP) Act that would eliminate the step-up in basis that beneficiaries receive when they inherit property. Currently, if someone inherits property, that property’s cost basis is “stepped up” in value to the property’s current value. This means that if the property is sold right away, no capital gains are due on the sale. If instead the property is held onto for a few years before it is sold and it rises in value, capital gains will be owed on the difference between the sale value and the stepped-up basis.

The STEP Act changes all this. The proposal would require an estate to pay tax on all previously untaxed gains. This means that if an estate includes property that has increased in value, the estate would have to pay taxes on that increase. However, the Act would allow the first $1 million of appreciated assets to pass without taxation. In addition, families that inherit a farm or business would be able to pay the tax in installments over a 15-year period. Any taxes paid under the bill would be deductible from the estate tax.

Although many view the basis step-up at death as a tax law “loophole,” its elimination would create paperwork headaches for estate administrators trying to locate cost basis information on assets that have been held for decades. “The change in the basis (or income tax treatment) of inherited property will be extraordinary for estate planners and their advisors,” commented estate planning attorney Jonathan Blattmachr to WeathManagement.com. "Such a change, especially if coupled with proposed dramatic changes in the U.S. estate tax system, would rock the world of every estate planner.”

It is unclear whether either proposed law has the support to pass the full Senate in their current forms. It is unlikely that any Republicans will support the legislation, so the Democrats would have to pass the bills through reconciliation, which would require all 50 Democratic senators to agree. 

Contact us

Elise Lampert, Esq.

Law Office of Elise Lampert

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com

 

Why an Irrevocable Trust May Be Superior to Gifting

Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets.  Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future. 

A trust is a legal entity under which one person -- the "trustee" -- holds legal title to property for the benefit of others -- the "beneficiaries." The trustee must follow the rules provided in the trust instrument. An "irrevocable" trust cannot be changed after it has been created. In most cases, this type of trust is drafted so that the income is payable to you (the person establishing the trust, called the "grantor") for life, and the principal cannot be applied to benefit you or your spouse. At your death the principal is paid to your heirs. This way, the funds in the trust are protected and you can use the income for your living expenses. 

While gifting assets outright is much simpler process than setting up a trust, the following are some of the advantages of setting up a trust instead:

• Income. Putting assets in a trust means you can receive income from the assets to continue to pay for living expenses. Depending on how the trust is set up, you can receive regular income payments or the trustee could have discretion to make payments. 

• Control. With an irrevocable trust, you as the grantor can maintain some control over the assets. You get to choose the trustees and establish the rules of the trust. You can also retain the right to change beneficiaries with a power of appointment in your will.  

• Asset protection from creditors. If you give money to a family member directly, that money could be lost to the recipient’s carelessness, creditors, or divorce. Keeping the funds in a trust protects the assets for the future. 

• Taxes. If the trust is structured properly, it can have a tax advantage for your beneficiaries. Assets that have gone up in value will receive a “step-up” in basis on your death, which means your beneficiaries will pay less in capital gains taxes. Assets that are gifted do not receive a “step-up.” 

• Medi-Cal. If you anticipate needing long-term care benefits in the future, then it is important to plan ahead. If you give away money or fund an irrevocable trust within the five years (the "look-back period") before applying for Medi-Cal, you may face a period of ineligibility for Medi-Cal benefits. The actual period of ineligibility will depend on the amount gifted or transferred to the trust. Putting assets in a trust allows you to plan ahead while retaining some income and control over the assets. 

To set up an irrevocable trust, contact your attorney. 

Contact us

Elise Lampert, Esq.

Law Office of Elise Lampert

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com

 

Using a No-Contest Clause to Prevent Heirs from Challenging a Will or Trust

If you are worried that disappointed heirs could contest your will or trust after you die, one option is to include a "no-contest clause" in your estate planning documents. A no-contest clause provides that if an heir challenges the will or trust and loses, then he or she will get nothing.

A no-contest clause may be a good idea if you have a beneficiary who may be upset by the property distributed to him or her. However, no-contest clauses (also called in terrorem clauses) only work if you are willing to leave something of value to the potentially disgruntled heir. You must leave the individual enough so that a challenge is not worth the risk of losing the inheritance.

Most states allow no-contest clauses, but there may be restrictions. In many states, if the contest is based on probable cause or good faith, then the no-contest clause is unenforceable. That means that if the court determines there is a good reason for the contest, the clause won't prevent the challenging heir from inheriting. In addition, a no-contest clause may apply to some portions of your estate plan, but not others. For example, your heirs may be able to challenge your executors without violating a no-contest clause.

Two states --Florida and Indiana -- will not enforce no-contest clauses no matter what. If you write your will in a state that enforces no-contest clauses and then move to Florida or Indiana, the no-contest clause will have no effect.

If you include a no-contest clause in your estate plan, you need to be sure there are no mistakes. If you leave out important property or aren't clear about property in your possession, your heirs could be completely disinherited if they try to fix any mistakes.

While a no-contest clause can be a good tool, there are other ways to discourage a will contest. Talk to your attorney to determine the best method to protect your wishes. 

 

Contact us

Elise Lampert, Esq.

Law Office of Elise Lampert

9595 Wilshire Blvd. | Suite 900 | Beverly Hills , CA 90212

Phone: (818) 905-0601 / Email: elise@elampertlaw.com

https://www.eliselampert.com