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9th April 2020

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Tara Unverzagt April 6, 2016 No Comments

What happens when you’re gone?

I was asked recently why one would establish a trust when estate planning. If you have a “simple situation”, a trust isn’t necessary. A simple situation would be if you and your spouse have only been married once, are still married, are US citizens, and don’t have children. If you want and expect your assets to go to your surviving spouse, you probably don’t need a trust. You may not even need a will. Many states have “default” actions when someone passes away that usually include assets being transferred to a surviving spouse.

If your estate is large or you have plans other than leaving your assets to your spouse, you may want to invest in a trust. A trust can help minimize estate taxes and control how your assets are distributed. If you have kids and do or don’t want to leave assets to them, a will may be sufficient, but the state and federal government can overrule your will. Also, a trust can give more options in transferring assets to a charity. If it’s important to you that your assets be distributed in a certain way, you will want to consider a trust.

Executing a will incurs probate tax which can be 2% to 7% of your assets. Since probate involves lawyers, you may have additional legal costs if there are disagreements on how assets should be distributed. The cost of a trust is approximately $2,000 and may need to be updated at various points of your life at additional expense. With a will or trust, you won’t have Federal estate tax if your assets total less than $5,430,000 in 2015 (this amount changes every year). If your assets are over this amount, you may be able to avoid some or all Federal estate taxes. You may have state taxes that vary from state to state.

If you have remarried, you also will want to consider a trust. In some states “surviving spouses”, even in a second marriage, have a right to claim up to half the estate. If there are children from more than one marriage, a trust is the best way to ensure assets are distributed the way you want.

To help minimize estate taxes, trusts can be generated at death. From a living trust that is active during your life, people often generate a marital trust at death to provide funds to a surviving spouse for the spouse’s life, with remaining assets going to the children upon the spouse’s death. This is usually paired with a family trust which has assets go directly to the children at death but retaining income for the remainder of the surviving spouse’s life. In some cases, there are more than two trusts generated to take care of various family members.

Most parents with special needs family members understand that they require special estate planning. A special needs trust can help them maximize the benefit of their resources after they pass. A trust can also help articulate what will happen to special needs family members and minor children. You can name a person to manage your financial assets and a different person to take care of your family members’ personal health and wellbeing.

If your situation is more complex than the “simple situation”, it’s important to contact an Estate Planning Attorney that understands the current laws. A good lawyer will also write provisions into a trust to automatically change as laws change. If you have a “simple situation” you will still want to research how your state handles assets on a person’s death. You may be surprised at what you learn.

If you’re comfortable with your assets going to your spouse and/or children in whatever way the state indicates, you don’t need a trust. If you care about what happens to your assets after death, a trust is sometimes the best way to go. A will can be contested which delays distribution, can be expensive, and may end in assets being distributed inappropriately. If you document your wishes in a trust, the courts make sure the instructions are executed as written.

All information provided is general in nature and not meant to be advice for you in particular. If you’d like to know more about how this topic relates to your situation, contact me at tara@southbayfinancialpartners.com.

Tara Unverzagt March 21, 2016 No Comments

How to Save at Tax Time

It’s that time of year to dig through the files and prepare your tax return for 2015. As I prepare tax returns and talk with clients I realize there are some tidbits of the tax code that aren’t obvious that could save you money or problems down the road. I thought I’d share them.

Medical Deductions

When deducting “medical insurance premiums” the IRS includes dental and qualified long term care. It does not include life insurance, disability, and other types of insurance. And do remember to provide premium payments, along with any “out of pocket” expenses for dentist, doctors, labs, prescriptions, to your tax preparer. You may not be able to use them, but you might be surprised. They have to add up to more than 10% of your Adjusted Gross Income (AGI) or 7.5% of AGI if you were born before 1951.

Did you know you can deduct acupuncture treatments as a “medical expense”? You can also deduct much of your travel expenses for medical treatment, even if that includes a plane trip. You cannot deduct nonprescription drugs, supplements, or health clubs. You can deduct the cost of weight loss programs, if it’s in response to a disease, like diabetes or high blood pressure. The cost of the program is deductible, the cost of food or other items is not.

Charitable Contributions

When you donate to a charity, you should make sure it’s really a 501(c)3. This is the tax code the IRS uses to determine that an organization is a non-profit charity. If it’s not a 501(c)3, you cannot deduct a contribution to the organization. You may still choose to donate, it just doesn’t affect your taxes. Any organization that is political in nature (a candidate or a political party would be included here) would not be a 501(c)3. Churches, schools, and other government organizations are automatically 501(c)3s.

Car Registration

Taxes paid for your car registration may or may not be deductible. In some states, like California, your car registration is based on the value of your car, that registration fee is deductible. In some states, like Illinois, the fee is based on the type of vehicle (car, truck, motorcycle, etc.) that is not deductible.

Real Estate Taxes

When you deduct your real estate taxes for itemized deductions, all real estate tax can be deducted. That includes second homes, extra lots that might be associated with your property, and in cities, if you “own” your parking spot, the property taxes on those can be deducted too.

Calculating the Cost Basis of Your Home

When calculating the cost basis for your home, vacation home, or rental (easiest if done as you live in your house and not left to when you sell the house), you can add improvements that increase the value of the house to the basis, but you can NOT include repairs. So fixing a leaky faucet doesn’t get added to your basis while repiping your house does. You also cannot add paint, wallpaper, and carpet to your cost basis EXCEPT if you are doing a major remodel or renovation, in which case you can include all the repairs and remodeling as well as actual improvements to the structure. You can find more information about cost basis in another posted article.

When you sell your house, if you meet certain criteria, you are exempt from paying taxes on $250,000 of gain for one person and $500,000 for a couple. You can take this exemption more than once, as long as you meet the criteria each time. You do not need to buy another home to take advantage of this exemption. If you end up selling at a loss, you do not get to realize the loss unless it is a business property. You can also take the loss on a home if it’s sold by an estate after death, even if it was a personal home, not a business property.

Is Your Child Really a Dependent?

You can take a child as a dependent if they live in your house and you pay most of their living expenses. If they move out of the house, and they have income, even as little as $4,000 of gross income (i.e. what they were paid or investment income), you won’t be able to declare them as a dependent. If you pay for more than half of the support of any relative, whether they live with you or not, you may be able to declare them as a dependent. That includes stepchildren, step-nieces & nephews, half-siblings, children-in-laws, parent-in-laws, aunts, uncles, adopted children. But if they have gross income you may not, even if they have no taxable income.

The tax code is vast and complex. Many people think they can deduct things that they can’t and they also miss deductions that can reduce their taxes. If in doubt, you can look at the publications on irs.gov. Publication 17 is often a great place to start and will refer you to other publications that have more details on particular topics. Or ask your tax preparer.

If there’s a tax topic that you’d like me to explore or a question answered, you can contact me at www.southbayfinancialpartners.com.


Tara Unverzagt March 11, 2016 No Comments

Sold Your Home? Now What?

A client recently contacted me about selling their home to retire in a sunny, warm place. They wanted to know what information they would need to collect about the sale of their home for their taxes. There are many tax benefits to purchasing a home which are well known, like deducting interest payments on a mortgage. And tax reporting occurs when you sell your home. I wish I could say gathering the data to report the sale is simple, but it’s not. The following outlines what you need to track when you buy a home.

When selling your house, you will need to know the dates you purchased and sold your home, the selling price and expenses, and the adjusted cost basis of the home. The first three are easy to determine. The adjusted cost basis is not.

The cost basis of real property (land and anything built on or attached to it) is usually its cost. Your adjusted cost basis is your cost basis plus any increases or decreases as described below. I’ll refer to adjusted cost basis as “basis” from now on.

It is easiest to calculate the basis of your house as you go along. If you wait until you sell your home, you are likely to miss many expenses that could increase the adjusted basis. You might consider keeping a ledger (on paper or in a spreadsheet) that keeps track of your basis, much like you do for your checking account balance.

Some costs/expenses you incur during the buying, selling, and maintaining of your home are added to your basis while other expenses you can deduct during the year the expense is incurred. You can’t do both.

Some credits reduce your taxes this year, but also reduce your basis, so you DO pay tax on those expenses, just not now.

If you add the cost of a capital improvement to your basis and you later remove the capital improvement, you must also reduce your basis. For example, if you add a fence to your property, you would increase your basis. If you later replaced that fence, the cost of the original fence would be subtracted from your basis and the cost of the new fence would be added.

Keep in mind that expenses which add to your basis will result in the sale of your home having a smaller gain (the sell price minus the basis) and thus potentially less taxes owed. Credits that cause you to reduce your basis will result in a bigger gain on the sale of your home and therefore potentially increasing taxes.

If you’d like a summary of what expenses increase and decrease your basis, please contact me.

The information given here is found in the IRS’s Publication 17.