Five ways to give your home away TAX-FREE

1.  Keep it until you die.   If your estate is below the unified tax credit, currently $4.49
million in 2017, when you die the property tax basis will be STEPPED UP to fair market value, saving your children capital gains taxes on the appreciation.

2. Give it to your kids now for free.  You can give your home to your kids now without paying a conveyance tax but you will tap into the unified federal gift and estate tax exemption which is $4.49 million in 2017.   Each year you can give away $14,000 per person without paying a gift tax.   As long as the net figure is less than $5.49 million you won’t own any gift tax but this amount adds up during your entire life.  This method doesn’t give the kids a step up in basis so they may have to pay capital gains tax when they sell it.

 3. Sell it to your kids for full price.  If your kids don’t have the money they can make a small down payment and carry a note on the property where they pay in monthly installments.  This way they can write off the payments as qualified mortgage interest and they don’t get hit with capital gains tax.  The only downside is that you have to pay income tax on the payments.   You can keep giving them the annual gift amount to ease the burden of the payments.

4.  Rent it from your kids after they buy it.   The IRS doesn’t like you to transfer your house and continue to live there.  The payments to your children can help finance buying the home.  The children can also claim rental property depreciation.  This is only possible if you sell the house for fair market value and pay market value rent, otherwise the IRS may say you didn’t give up possession and enjoyment of your home and get you for the date of death value of your home in your taxable income.

5. Use a Qualified Personal Residence Trust (QPRT). Using a QPRT you can gift your house to your kids while still living in it without having them pay  the fair market value price.  This required you to put the property in an irrevocable trust for several years.  The IRS has a calculation to value the right to live in the house.  When the duration of the trust is up, the owner can pay rent to the children.  The down side is your kids can kick you out onto the street and if you don’t outlive the trust then the kids receive no tax breaks.


Death check list:

Here is a list of what to do when your loved one passes away.   If this is not an emergency situation, sit back, take your time and breath.

  1. Notify a doctor, coroner or local police officer that the person has died, herein after called decedent.
  2. Look for the decedent’s trust and will and look for the decedent’s wishes to see if they wanted to donate their organs and alert the coroner.
  3. Get Death Certificates.
  4. Notify your family and friends of the death.
  5. Look in the will for burial wishes.  A Trust will name a successor trustee and if there is no trust then a Will will name an executor to administer the estate.
  6. Contact a funeral home regarding cremation or burial.
  7. Contact government organizations and benefit programs like the Social Security Administration that are making payments to the decedent.
  8. The Trustee of the Trust must look through the estate planning documents and find the assets list located on schedule A.  One by one, the Trustee will deal with each asset. If there is only a Will the executor of the will can look to see whats assets the Decedent had.  Everything hopefully has been given away already.  If not the Will must be taken to the county office to be accepted for Probate.
  9. Look for Safe deposit keys, life insurance policies, retirement benefits, tax returns, marriage, birth and death certificates, records of personal assets and business documentation, bank statements, check books, titles to cars and deeds of properties, lease agreements, securities, health insurance, stocks, bonds and investments, make claims for unpaid bills and final illness and look for insurance policies and annuities.  Call and cancel credit cards, bills and any thing else that the Decedent may still be paying.
  10. If there is no will and there are enough assets to probate, an administrator will be appointed by the court to distribute the assets according to state law.
  11. As trustee, go to the bank and change the trust account to have a new Tax ID number.  If the bank will not allow that, open a new bank account for for the decedent’s estate so that all expenses of administering the estate can be recorded and reimbursed.
  12. Probate is the process where the executor reports all the of assets to the court, pays debts, taxes and other expenses and distributes the assets according the the decedent’s wishes.  This process takes about 8 months and can be costly.
  13. If there is no Trust Look for property deeds and and any property owned in other states which will be probated in that state.
  14. If the Decedent owned a business look for a buy/sell agreement.
  15. Pay taxes, debts and creditors.  If the assets are distributed before paying creditors the executor may be held personally liable for the debt.
  16. The Decedent’s income taxes must be filed and paid for the year of death.  A surviving spouse can file jointly for the year of death.
  17. A Trust will become irrevocable at the time of death of the last Trustor.  A separate tax return must be filed for the trust called a Form 1041. Fiduciary Income tax return, if the trust estate is receiving income.
  18. The Will lists the guardian for Minor children.  If no guardian is listed, the court must appoint a guardian.
  19. The trustee or executor must make sure that any real estate insurance policies of the decedent are maintained.
  20. Collect Veterans benefits and other Joint and survivor benefits for the surviving spouse.

10 ways to avoid Capital Gains Tax

A capital gain is a profit made from selling an asset such as a stock, bond or real estate.  The U.S. government taxes capital gains at different rates.  Short-term capital gains (held one year or less) are taxed at your normal tax rate.  Long-term capital gains (held over a year) benefit from a reduced tax rate.    There are multiple ways to avoid Capital Gains that are incentivized by the government.

10 Ways to avoid Capital Gains:
1.  Matching losses
Capital losses can be used to reduce your taxes by matching your gains and losses the government allows you to use up to $3,000 of excess losses not used to cancel gains per year to reduce your taxable income.   Losses in excess of matching gains plus $3,000 can roll over to future years.

2. Exclusion of Primary Residence
An individual can exclude up to $250,000 and $500,000 for a married couple of capital gains from the sale of their primary residence.  Certain rules apply such as living in the house 2 out of the last 5 years.

3.  Retirement accounts
One benefit of retirement accounts is that you can defer paying taxes on any gains until you take the money out.  The downside is that you are taxed at the normal tax rate when you take the money out, thus losing the benefit of the long-term capital gain tax rate.

4. 1031 Exchange
This section of the tax code allows capital gains tax to be deferred with the sale of rental or investment property if the proceeds of the sale are put into a similar type of property within a certain amount if time.  You will want to use a 1031 exchange accommodator to make sure you comply with all the rules.
IRC Section 1031 (a)(1) states:    “No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment, if such property is exchanged solely for property of like-kind which is to be held either for productive use in a trade or business or for investment.”

5. IRAs
Contributing to a traditional IRA or 401k can reduce your income while in a higher tax bracket and can eliminate capital gains while trading in the account by deferring it.

Roth IRAs can avoid capital gains tax all together.  A Roth IRA allows for tax-free growth for your life and your heirs lives.

6.  Health savings accounts (HSAs)
These accounts allow for a tax deduction when contributing or investing in them.   They also allow for tax free growth and it is possible to avoid paying taxes on this account if withdrawals are used for qualified health expenses only.

7.  Gifting to family
By giving away a highly appreciated stock to a family member in a lower tax bracket you can avoid paying high capital gains tax. It will be subject to the same cost basis but this will be applied to the lower tax rate for the family member.

8.  Gifting to a Charity
You can gift almost any appreciated asset to a charity and the charity will not pay capital gains on the stock upon selling.  You can actually give more to a charity this way than by selling the stock yourself because you would have to pay capital gains.

9  Move States
Certain states charge higher capital gains tax with California ranking in at the highest at 37.1%.

10.  Die
Upon your death, your heirs get a step up in cost basis and do not have to pay capital gains tax except for retirement plans and annuities.

Have you updated your trust since 2004?

DOES THE NAME TERRI SCHIAVO RING A BELL?  All of us watched the unfortunate events on the news BACK THEN involving one family’s struggle with the right to die with dignity.  Regardless of how you felt about that situation, everyone agrees your wishes should be stated in your estate planning documents.  Because of a change in the law effective in 2004, YOU MAY NOT HAVE THE NECESSARY LANGUAGE IN YOUR DOCUMENTS.  The new law is called the “Health Insurance Portability and Accountability Act” or “HIPAA” for short.  The problem is the new law does not allow your loved ones to get your medical information if you are incapacitated.  To review, in a living trust there are four documents: 1) the living trust (for assets titled in the trust), 2) the will (for assets accidentally not titled in the trust), 3) the health care document (for medical decisions), and 4) the power of attorney (for other important decisions).  If your trust has not been undated since 2004 we need to amend your living trust so your “successor trustee” can get medical information to show that you are incapacitated. We need to prepare a new health care document so your “health care agent” can get medical information to make the right decision if you are incapacitated and finally, we need to prepare a new Durable Power of Attorney for Assets so your “attorney in fact” can get medical information to show that you are incapacitated.

Special needs trust

Do you have a child, relative or friend that is receiving government benefits?    If they receive any type of inheritance this may disqualify that person from receiving government benefits leaving them with a small inheritance with no help from the government.   A special needs trust can provide for someone receiving government benefits by giving the trustee full discretion regarding how much that person should receive in order to maintain government benefits.  A special needs trust can be a separate trust specifically made for the person receiving government benefits or it can stem from your trust providing for that person individually apart from other benficiaries.  Leaving an inheritance to someone with special needs may actually be a hindrance to their care unless a special needs trust is created protecting that person’s best interest.

Getting started

We want to help your family avoid court when you die or become incapacitated. You need several estate planning documents to ensure that your assets will not have to go to probate. Click on the “living trusts” button to learn about each document. What makes us different from other law firms is that our documents are written in plain English, we charge flat fees instead of by the hour, and we offer free telephone and email support to you and your loved ones. We will analyze your situation and explain to you what it means to your family in dollars and cents. Call Kristen at (808) 870-2687 or email at to get started.

Do I need a Will or Trust?

No Will or Trust:  If you die without a Will or Living Trust the state will decide what happens to your property through a process called Probate.  Your property will be distributed to your spouse and/or children or your closest relative or it may be given to the state.   The court will also decide who will care for minor children if the other parent is unavailable.   Without a will, the surviving partner of an unmarried same-sex couple will receive nothing unless it is in one of the few states that allow registered domestic partners to inherit like spouses.

Probate:  Probate is a court supervised process paying debts and distributing property after death.  This process is costly and time consuming for the beneficiaries.    It can take months and costs thousands of dollars.  This process can be avoided by obtaining a Living Trust.

Just a Will:  Having a Will is a good start but a Will still must go through the probate process in the state where the person died.  The court will decide if it is a valid Will and how to distribute the property.  In a Will you can leave property, possessions and investments to whomever you would like and you can also name a guardian for your minor children and designate a person to manage property that is left for the children.

Living Trust:  A Living Trust is a legal document which you create during your lifetime to transfer your assets into the ownership of the trust.  This is a way to avoid probate after your death.  As the trustee of the trust you maintain control over the assets.  Upon your death the successor trustee distributes the assets to the beneficiaries so there are no lawyer or court fees to pay thus avoiding probate.

Other important documents:
1) Pour-over Will
2) Health Care Directive
3) Springing Durable Power of Attorney

Pour-over Will:  Property that is not properly titled in a trust can avoid probate through a pour over Will.  This ensures that if something was left out like a newly bought car it will be put into the trust through the pour-over Will.   This is also where you designate a guardian for minor children.

Health Care Directive:  This is a legal instruction regarding your preferences for medical care if you are unable to make medical decisions for yourself.  It is important to have a Health Care Directive so that if you are incapacitated upon entering the hospital you are able to receive the care and treatment that you want and are not stuck in an undesirable situation because you are unable to make a decision.  You need the HIPAA waiver in your health care document so that your loved ones can not only make life and death decisions if you are incapacitated, but also see medical information and talk to the health care professionals about you.  Without the waiver, they can’t.

Springing Durable Power of Attorney:  This document allows you to choose someone to make decisions regarding property, investments and finances for you if you become incapacitated.

Kristen Spees Maui Attorney at Law