Understanding the New Taxes Coming in 2013
The health care bill that passed in March 2010 has two new taxes starting in 2013 to help pay for it – an extra 0.9% levy on wages for couples earning more than $250,000 ($200,000 for singles) and a new 3.8% tax on investment income, which in effect adds a “payroll” tax on unearned income.
How does the 0.9% tax work? If a couple earns $350,000 under current rules, they owe 1.45% or $5,075 and their employer owes a matching amount (Medicare tax due). In 2013, the couple will owe an extra 0.9% on any wages above $250,000. For this example couple, that is 0.9% of$100,000 or $900. Their employers pay nothing extra.
How does the 3.8% tax on net investment income work? It is keyed to the “modified adjusted gross income” with a threshold of $250,000 for couples and $200,000 for singles. For example, a couple has $400,000 of adjusted gross income — $200,000 in wages and $200,000 in investment income. Thus, they have $150,000 of income above the $250,000 threshold and they would owe an extra $5,700 in taxes.
To better understand this tax, you need to understand what is considered investment income. Interest, except municipal bond interest, dividends, rents, royalties, capital gains, insurance annuity payouts, passive income, and even gains on the sale of a home above $250,000 (single) or $500,000 (couple) counts. The 3.8% will also be put on trusts and estates.
What is not taxed will be regular and Roth IRAs, retirement accounts, Social Security, life insurance proceeds, and veterans’ benefits.
What steps can you take to minimize these benefits? Examine both your regular and investment income. Look at a Roth IRA conversion as Roth withdrawals don’t raise A&I and aren’t considered investment income.
If you have a small business, consider a defined pension plan, as their payouts don’t count as investment income. If you are selling assets, consider an installment sale as it spreads out the income.
Lastly, life insurance may become more attractive as proceeds at death are not subject to this tax. That means that a taxpayer could buy a policy, borrow from it, and then settle up at death thus avoiding income tax on investment gains.
So, get ready for these new taxes in 2013.
Proper Care and Feeding of a Living Trust
*This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal advisor who is familiar with your personal situation. We are lawyers based in California. If your matter involve non-California issues, please contact a local lawyer.*
URGENT REMINDER: Many Lenders ask you to take property out of Trust ownership when you get a mortgage, but they don’t put it back in afterwards. A Trust avoids Probate Court for assets properly titled in the name of the Trust. If property is out of Trust at death, it is subject to Probate Court. This is a BIG mistake that can be fixed easily now, while you are alive; if not fixed, it will explode later.
So check your property tax bill NOW. Even if you are SURE it’s OK.
As always, the key to proper maintenance of the Trust is to make sure assets are properly titled in the Trust:
a) It is important to review your estate plan periodically to make sure that you still trust those people you have appointed to act after your death, as well as to ensure that the dispositive provisions still meet your present desires.
Are minors on track, or have they detoured?
Our trusted people: are they still competent or senile? Do we need to reconsider who should be in charge?
b) Make sure your Health Care Agent has copies of your medical form. If they get a call in the middle of the night, they may need to grab the form and run to the hospital. Can they find the form (or did they lose it and need a new copy)?
c) When you are dead or incapacitated, the people on whom you dumped this huge chore need some guidance from you to make it as easy as possible for them.
But, if you are dead, can they find your assets? (Bank and stock accounts, safe deposit box, real estate, retirement plans, and insurance? If you have no insurance, think how much time they might waste looking for it, just to make sure they did not overlook something.) Put a current asset list with your Trust papers.
Can they access your computer and the requirements of modern life: email, banking, etc. If you are dead or hospitalized, can they find your passwords?
Can they find your accountant, broker, insurance agent, lawyer, and property managers? Tell them whom to trust and who they should not.
d) Do they know your wishes? Either discuss this with them now, or write them a letter (to be opened after your death) with instructions so they know.
They should know your funeral wishes before they are “guilted” into spending a fortune (unless that’s what you want).
e) Consider writing an “Ethical Will”; a letter (to be delivered after death) of advice about life. Ethical Will: Life Lessons for your Heirs: Tell them who and what you are; who and what you hope they will be. This is not a legal document, but a life lesson letter to your descendants. This is a wonderful way to stay connected with family over future generations. It might contain:
Lessons you have learned (perhaps they can learn from your mistakes);
Personal experiences; or
Family stories and histories which otherwise will be lost forever.
I keep updating letters to my wife and daughters on my computer whenever I am reminded of a lesson in life.
Always, the major chore in the maintenance of a Living Trust is to make sure that all of your assets which have any form of registration are properly titled in your Living Trust. These assets include bank accounts, stock, and real estate. Now is a good time to verify that all such assets are held properly.
You should have received a real property tax bill for each parcel of California real estate you own.
[Please verify from your tax bill that the Homeowner's Exemption is claimed on your personal residence. If not, call your local Tax Assessor for a claim form.]
You also will receive Forms 1099 showing interest or dividends received during the past year, and K-1s for Partnerships.
Please check each real property tax bill, Form 1099, and K-1 to ensure that it reads something along the lines of:
John and Mary Smith, Trustees of the Trust of John and Mary Smith, dated January 1, 1991.
There may be other property which should also be in the Trust but may not provide annual reporting, such as stock which does not pay dividends and, therefore, no 1099 is provided.
Pension Plans, IRAs, and Life Insurance are not usually in Trust: they are owned by you individually, and payable to the Trust at death.
[Creditors (such as your mortgage holder and credit cards) do not need to know about the Trust; only those holding your property should know.]
If you inherited any property or received substantial gifts since formation of the Trust, you should discuss its status and your desires with an attorney.
If you refinanced your property since doing the Trust, you should verify that the property is back in the Trust.
If you bought new property or opened new investment accounts, you should verify that these are properly held in the Trust.
If your marital status (or domestic partnership status) has changed since the formation of the Trust, we should discuss the ramifications.
Although it may not be necessary, it may provide additional certainty to execute annually a statement that all property is in the Trust. This clarifies that any property you may have acquired is in the Trust.
If you have any questions email me at marcw@wwlaw.com
*In accordance with Treasury Regulations Circular 230, we are obligated to inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.*
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Should I Put the Kids on Title? NO!
*This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal advisor who is familiar with your personal situation. We are lawyers based in California. If your matter involve non-California issues, please contact a local lawyer.*
That’s the worst idea ever!
I hear it all the time. “We have 2 grown kids. We are getting older. we want to put the kids on title to our home.” Why does this happen so often? What is the problem? Here is an example:
Dad died. Mom is alone and feeling mortal. She has 1 child: a grown Son. He is a good Son. Attentive. Caring. Helpful. If Mom puts him on title as a Joint Tenant, when Mom dies Son automatically inherits without Probate.
Why is this a terrible idea? What can go wrong?
Son, now an owner, can:
- voluntarily evict Mom;
- force sale of the property; or
- take other adverse actions.
When I explain these risks to a client, the answer invariably is: “MY son would NEVER turn against me. He is wonderful and would never voluntarily hurt me.” But what about involuntary actions? Such as:
- What if Son is DIVORCED and his ex-wife ends up owning a part of Mom’s house. The ex HATES Mom. (For years she heard how much better a cook Mom is.) The ex-wife does some of those voluntary nasty things.
- What if Son is SUED (for a business / personal problem) and then Son’s creditor seizes Son’s half of Mom’s house?
- What if Son DIES and leaves his half to his Wife?
- What if Son has an IRS lien?
All of these issues are potential danger points for Mom. But, what is the benefit for Mom? Nothing, unless she dies. Mom’s death was the whole point of putting Son on title in the first place: to avoid Probate when Mom dies. The better way to avoid Probate with no risk to Mom is a Living Trust. Obviously, if Mom has 3 kids, and puts all of them on title the risks are tripled.
My Grandfather was a lawyer. When I started practicing with him in 1980 he warned me about this issue. Clients would come to him to put the kids on title. He warned them against it. He felt so strongly that if a client insisted on doing it despite his counsel, my Grandfather refused to assist. He sent them away. “If you don’t like my advice and want to do it anyway, get someone else to help you. I won’t be a party to this mistake.”
Personally, I advise clients the same, but if a client insists, I will not send them away. I am not surprised when clients do not listen. I figure after I cover my rear by putting these warnings on paper and having them sign a consent, they are entitled to make their own decisions.
After my Grandfather’s death, my Grandmother asked me if she should do the same thing! I told her exactly what her own deceased husband told his clients all of his life: Don’t do it! She did. And nothing terrible happened. But with no-risk alternatives (Living Trust), why do smart, intelligent, people who know better continue to do this? Because it cannot happen to them!
I’ve seen this personally with two different clients. In one case the child had to file for bankruptcy which affected their 50% ownership of the Mother’s home because Mother insisted on putting the daughter on deed rather than doing a Living Trust. The other client had a business go under and is being sued for $200,000,000. What does this mean for the 50% of his Mother’s house? Nothing good.
Also, something to consider is the gift tax issue. A very interesting issue about putting the kids on title is whether a gift has been made with gift tax consequences. If Dad deeds his home to Dad + 3 sons as Joint Tenants, and the house had equity of $100,000, did Dad make a gift of $75,000? Or was no gift made because it is merely a paper transfer: it is still Dad’s house and the kids don’t really own it. These issues must be examined.
If you have any questions email me at marcw@wwlaw.com
*In accordance with Treasury Regulations Circular 230, we are obligated to inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.*
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Property disclosures addressing death.
*This information is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal advisor who is familiar with your personal situation. We are lawyers based in California. If your matter involve non-California issues, please contact a local lawyer.*
It is undisputed that all material facts known to the Seller affecting the value OR desirability of the property must be disclosed. Lingsch v. Savage, (1963).
Real Estate Agents deal with many different circumstances surrounding the sale of a property. One of those is, unfortunately, death. The question then is, should the death on the property be disclosed? This has been addressed twice, once by case law, and once by statute:
Death on property may be material. Reed v. King, (1983).
Civil Code §1710.2 states that death on a property need not be disclosed if it occurred more than 3 years prior to a sale. The statute does NOT say that a death within 3 years must be disclosed.
If a death occurs on a property within 3 years, and the circumstances of that death are material (e.g. it was a gruesome or offensive death, or affected the reputation of the property), it must be disclosed. This is not taking into consideration the entirely different situation where a house has a security problem, which would require the security defects of the property to be disclosed. Rather, we are considering situations unrelated to the security of the property itself.
Although it is not on the Transfer Disclosure Statement, many brokerage firms use Supplemental Disclosure Forms which specifically inquire about death. In these cases Real Estate Agents must understand the law in order to avoid lawsuits for their Sellers. If a Buyer subsequently discovers a death occurred within 3 years of the purchase, the Buyer may sue the Seller for rescission or damages.
It is very easy to avoid this problem. Disclose if a death has occurred within the last 3 years. Don’t be the judge of whether it is a material death, or not. Disclose, and let the Buyer decide.
If the death is more than 3 years old Civil Code §1710.2 requires disclosure only if the Buyer asks.
If a Buyer is concerned about death on the property, ask the Seller if any deaths have ever occurred. Although there is no obligation to inquire about material facts since the Seller has a pre-existing duty to disclose (again, withing 3 years), asking up front is easier than discovering a problem later.
Events on a property leading to a death off of the property, should also be disclosed.
One other situation that is specifically addressed in the civil code is, Civil Code §1710.2 which absolves anyone from liability for nondisclosure of AIDS related deaths, regardless of how recently the death may have occurred.
A memorandum from the California Association of Realtors (CAR) issued in June, 1990 addressed the issue of death and AIDS disclosure requirements. If you would like a copy, please call your local Board of Realtors®.
*In accordance with Treasury Regulations Circular 230, we are obligated to inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.*
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Common Methods of Holding Title
The form of ownership taken and the vesting of title will determine who may sign various documents involving the property and future rights of the parties to the transaction. These rights involve such matters as real property taxes, income taxes, inheritance and gift taxes, transferability of title and exposure to creditor’s claims. Also, how title is vested can have significant probate implications in the event of death.
The California Land Title Association (CLTA) advises those purchasing real property to give careful consideration to the manner in which title will be held. Buyers may wish to consult legal counsel to determine the most advantageous form of ownership for their particular situation, especially in cases of multiple owners of a single property.
Sole Ownership
Sole ownership may be described as ownership by an individual or other entity capable of acquiring title. Examples of common vesting cases of sole ownership are:
1. A Single Man/Woman: A man or woman who is not legally marries or in a registered domestic partnership. For example: Bruce Buyer, a single man.
2. A Married Man/Woman or a Domestic Partner as His/Her Sole and Separate Property:Â A married man or woman or a domestic partner who wishes to acquire title in his or her name alone. The title company insuring title will require the spouse/partner of the person acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both spouses/domestic partners want title to the property to be granted to one spouse/partner as their sole and separate property.
Co-Ownership
Title to property owned by two or more persons may be vested in the following forms:
1. Community Property:Â A form of vesting title to property owned together by husband and wife or by domestic partners.
Community property is distinguished from separate property, which is property acquired before marriage or before a domestic partnership, by separate gift or bequest, after legal separation, or which is agreed in writing to be owned by one spouse or domestic partner. In California, real property conveyed to a married man or woman, or to registered domestic partners, is presumed to be community property, unless otherwise stated. Since all such property is owned equally, both parties must sign all agreements and documents transferring the property or using it as security for a loan. Each owner has the right to dispose of his/her one half of the community property by will. For example, Bruce Buyer and Barbara Buyer, husband and wife, as community property.
2. Community Property with Right of Survivorship: A form of vesting title to property owned together by husband and wife or by domestic partners. This form of holding title shares many of the characteristics of Community Property but adds the benefit of the right of survivorship similar to title held in joint tenancy. There maybe tax benefits for holding title in this manner. The interest must be created on or after July 1, 2001. On the death of an owner, the decedent’s interest ends and the survivor owns the property. For example, Bruce Buyer and George Buyer, registered domestic partners, as community property with right of survivorship.
3. Joint Tenancy:Â A form of vesting tied to property owned by two or more persons, who may or may not be married or domestic partners, in equal interests, subject to the right of survivorship in the surviving joint tenant(s). Title must have been acquired at the same time, by the same conveyance, and the document must expressly declare the intention to create a joint tenancy estate. When a joint tenant dies, title to the property is automatically conveyed by operation of law to the surviving joint tenant(s). Therefore, joint tenancy property is not subject to disposition by will. For example: Bruce Buyer, George Buyer and Barbara Buyer, as joint tenants.
4. Tenancy in Common: A form of vesting title to property owned by any two or more individuals in undivided fractional interests. These fractional interests maybe unequal in quantity or duration and may arise at different times. Each tenant in common owns a share of the property, is entitled to a comparable portion of the income from the property and must bear an equivalent share of expenses. Each co-tenant may sell, lease or will to his/her share of the property belonging to him/her. For example Bruce Buyer, a single man, as to an undivided 3/4 interest and Penny Purchaser, a single women, as to an undivided 1/4 interest, as tenants in common.
Other Ways of Vesting Title Include As:
1. A Corporation*: A corporation is a legal entity, created under state law, consisting of one or more shareholders but regarded under law as having an existence and personality separate from such shareholders.
2. A Partnership*: A partnership is an association of two or more persons who can carry on business for profit as co-owners as governed by the Uniform Partnership Act. A partnership may hold title to real property in the name of the partnership.
3. Trustees of a Trust*:A Trust is an arrangement where by legal title to property is transferred by the grantor to a person called a trustee, to be held and managed by that person for the benefit of the people specified in the trust agreement, called the beneficiaries.
4. Limited Liability Companies (L.L.C.)*: This form of ownership is a legal entity and is similar to both the corporation and the partnership. The operating agreement will determine how the L.L.C. functions and is taxed. Like the corporation, it’s existence is separate from its owners.
*In cases of corporate, partnership, L.L.C., or trust ownership – required documents may include corporate articles and bylaws, partnership agreements, L.L.C. operating agreement and trust agreements and/or certificates.
Remember: How title is vested has important legal consequences. You may wish to consult an attorney to determine the most advantageous form of ownership for your particular situation.
This information is provided by North American Title Company. More information can be found at www.nat.com.
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