When you inherit property, such as a house or stocks, the property is usually worth more than it was when the original owner purchased it. If you were to sell the property, there could be huge capital gains taxes. Fortunately, when you inherit property, the property’s tax basis is “stepped up,” which means the basis would be the current value of the property.

The transfer of any asset from an estate to an heir can trigger tricky tax issues. Sometimes things can get even more difficult when it comes to a tricky tax like the capital gains tax, so it is worth knowing the ground rules ahead of time.

ElderLawAnswers.com recently considered this subject and the key rules of thumb in an article titled “Do You Pay Capital Gains Taxes on Property You Inherit?”

In the normal course of things post-mortem, the estate pays any state and federal estate taxes, then the heirs might even pay a state inheritance tax. Thereafter, if the heirs sell any inherited asset, then they may not pay any capital gains taxes if the asset is sold at or below its date of death value. This is the magic of what is called the “stepped-up basis.”

Capital gains are always measured by the “basis”, or the original value to the person being taxed (that is how you measure appreciation, after all). This becomes tricky, however, if the asset in question is “gifted” to an heir while the owner is alive. When this occurs, then the heir is stuck with the original “basis” of the one who gifted the asset.

For example, a home purchased in 1972 and “gifted” in 2013 most certainly will have substantial appreciation given real estate values over 40 years. If the home is later sold by the donee, then substantial capital gains taxes will be owed.

On the other hand, the same home inherited in 2013 by the same heir can be sold with some 40 years of appreciation stepped-up to current fair market value and sold with minimal, if any, capital gains taxes owed.

The capital gains tax is anything but simple. Accordingly, consider this a brief introduction to a complex subject. The simple point to take away is that the timing of wealth transfer has serious tax consequences.

Fortunately, capital gains taxes can be minimized, if not prevented.

Reference: ElderLawAnswers.Com (August 7, 2013) “Do You Pay Capital Gains Taxes on Property You Inherit?

While fights over cash and stocks after a relative dies are common, families feud just as often over memorabilia and personal items that have little monetary value. And in some cases, it’s the happiest families that are in the most danger of falling out over inheritances, because they’re more likely to attach sentimental value to parents’ personal possessions. Some of the worst family fights start over a trinket.

Will your family fight over the “stuff” you leave behind? Surprisingly, the stuff they fight over is the stuff you would least expect.

This is a problem as old as “family” itself. Regardless what you will leave behind, it is important to ensure that your plans are carefully designed to anticipate potential problems and communicate your wishes through proper estate planning.

This was the subject of a recent article in DailyFinance titled “Stop Family Feuds Over Inheritances Before They Start.” The article notes that it is not just the stocks, real estate, jewelry, or priceless artwork you need to consider. In fact, it seems items with “sentimental” value can be all the more important. As one attorney quoted in the article observed: “More than 50 percent of the lawsuits we see are about items that have a total asset value of less than 10 percent of someone’s estate … The toughest part about family fights over a piece of jewelry or a painting is that it isn’t about the value of the item, it’s about what it means to loved ones.”

The original article offers some practical advice and examples to get you thinking. Until you click over to the original article, here are five specific tips:

1. Make an inventory.
2. Share the inventory with family members.
3. Appraise your property.
4. Set up a jury system.
5. Write a personal property memo.

So how do you stop or pre-empt a family fight over inheritances? Truly the answer depends on your own family, their wants, their desires, and, most importantly, the things they hold dear and why.

For more information about inheritance planning in the Salt Lake City, UT area, please visit my estate planning website.

Reference: DailyFinance (August 7, 2013) “Stop Family Feuds Over Inheritances Before They Start“

In an ideal world, [the vacation home], whether a modest cabin or an elaborate villa, is a symbol of a family’s history, emotions, and values … But as summer draws to a close some families, who have spent less than idyllic time in the cabin together during the past several months, will come to terms with the fact that it can also be a battleground.

Ah, the family vacation home. Whether woodsy cabin, salty beach house, or just plain relaxing place out of town, few places prove to be so powerfully uniting for a family. Then again, there also are few places where it is easier to get into a family fight. As it turns out, a vacation home can become a sore spot when it comes to planning for it in your estate.

Estate planning is about planning for three things: the needs of your family, the straightforward assets you have, and the difficult assets you have (whether to transfer, own or both). Curiously, planning for your vacation home is about all three of these things in one.

Forbes recently considered the precarious balance between getting it right and getting the family into a fight over the vacation home in an article titled “The Family Cabin: Private Retreat Or Isolated Battleground?”

To plan for the vacation home, as with the family home, the family business, or anything truly precious, it pays to plan openly with your family and to plan decisively. Some family members may not want the house, and some might not be able to keep the house even if you gave it to them. On the other hand, perhaps everyone wants it.

Having an open discussion within the family, or even just one member at a time, allows you to uncover whether what they want is what you want for them and vice versa. After conducting your research, design and implement your plan. Once everything is in place and the ink has dried, then inform them of your plan and stick to it.

Some legal tools to consider include trusts, like a QPRT (Qualified Personal Residence Trust), or perhaps formal business entities to own the vacation home and share it amongst your heirs. There is a lot of room for creativity.

Take a look at the original article and begin exploring this subject with your family. Regardless, be sure to enjoy the rest of these warm summer days wherever your family vacation home is.

For more information about taking care of the family vacation home in the Salt Lake City or Utah area, please visit my estate planning website.

Reference: Forbes (August 12, 2013) “The Family Cabin: Private Retreat Or Isolated Battleground?”

A recent court case highlights how risky it is when a married couple attempts to use a post-nuptial agreement when trying to waive spousal benefits to an employer retirement plan. In the case of Mid-American Pension v. Michael Cox, the court ruled that a surviving wife’s promise to waive her rights to her husband’s 401(k) funds by signing a post-nuptial agreement was invalid because the agreement wasn’t drafted correctly.

There is a lot at stake when two people decide to get married. Consequently, it is becoming more and more common for a marriage to start with an agreement: a pre-nuptial agreement or even a post-nuptial agreement. While there is a lot at stake, there also are a lot of strict rules that come to bare on the agreements you make. Understand them and plan accordingly, or risk an unexpected backfire down the road.

Specifically, and in light of the recent case of Mid-American Pension v. Michael Cox, it is important to appreciate that IRAs and other specific assets with named beneficiaries and separate legal designations are just tricky when it comes to any legal planning. More to the point, pre-nuptial or post-nuptial planning for these assets can be risky, as highlighted in a recent article in The Slott Report titled “Using Post-Nuptial Agreements for Employer Plan Benefits is Risky.”

In the case of Mid-American Pension v. Michael Cox, a husband and wife came to an agreement and signed a post-nuptial agreement promising to disclaim any right to the other’s assets in the event of divorce. Mr. Cox filed for divorce (this was the third time, and they had been married to and divorced from each other twice before), but never succeeded because he passed away before the proceedings could be concluded. All the same, Mrs. Cox was supposed to disclaim everything, including his IRA, but that did not happen. The parents of Mr. Cox were the intended and designated beneficiaries of their son’s IRA.

When the not-yet-ex-wife and her in-laws went to court, Mrs. Cox prevailed because the proper protocol for disclaiming an interest in retirement funds was not followed. You see, IRAs, pensions, and the like have very specific and legally enforced requirements, and the post-nuptial agreement did not cut the mustard. In fact, a simple form from the plan provider would be necessary in this instance.

IRAs and pensions are one thing, but they are not the only assets to consider when entering into a pre-nuptial or post-nuptial agreement. Follow the “carpenter’s rule” and measure twice and cut once. There are few do-overs if the time ever comes when the agreement must be enforced.

For more information about planning for retirement in the Salt Lake City, UT area, please visit my estate planning website.

Reference: The Slott Report (August 13, 2013) “Using Post-Nuptial Agreements for Employer Plan Benefits is Risky”