Hypothetical tax question

[joey2665]

Originally Posted by FlyingScot

The surviving spouse does not get the stepped up value. But their kids will.

This is incorrect advice consult a professional


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[DesertDweller]

Originally Posted by joey2665

This is incorrect advice consult a professional


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Agreed. Talk to someone. It will be well worth your time and money.

Here is a good article to give you some initial thoughts.

https://legacyassuranceplan.com/arti...ep-up-in-basis

[Sue Doe-Nym]

I guess my question wasn’t completely hypothetical, though that was my intention. We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better? In a perfect world, the property would pass on to the next generations, BUT the surviving spouse might choose to sell for a variety of reasons, not always related to money or disability. Loneliness could be a huge factor. Anyhow, interesting subject. Thanks.

[joey2665]

Originally Posted by Sue Doe-Nym

I guess my question wasn’t completely hypothetical, though that was my intention. We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better? In a perfect world, the property would pass on to the next generations, BUT the surviving spouse might choose to sell for a variety of reasons, not always related to money or disability. Loneliness could be a huge factor. Anyhow, interesting subject. Thanks.

Sue I don’t give tax advice in the general area, I sent you a PM


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[tis]

Nobody owes capital gains until it's actually sold, if that's what you mean.

[jeffk]

I'm not a tax expert and being a spouse changes the inheritance process but I will lead with a couple facts and then speculate.

First, it depends as to where you reside as to the state inheritance tax and I won't have anything to say about that beyond that NH does NOT have an inheritance tax.

Second, the federal exemption on an inheritance is almost $13 Million in 2023 and is indexed for inflation so it continues to increase.

Now the speculation, if you jointly own a home with rights of survivorship, a common situation, when your spouse dies, you "inherit" their half. If their half is less than $13M (total of ALL their wealth), there is NO federal capital gains tax on the inheritance. Further, the value of their half of the property is set to the value at their time of death. You should get a couple of official estimates on the property ASAP to set the value. If you sell the property, half the purchase valuation is now reset to the current amount. If you give it to your kids at the time of your spouses death, their purchase valuation is now current value for the spouse's half but original purchase value for your half.

However, if you pass it along at your death, your estate ALSO gets a $13M exemption and your half of the valuation of the property is ALSO reset to current value. THEN if your kids quickly sold the property, the taxable valuation would be any growth since your spouse died on half of the sale and effectively $0 on your half.


Apparently though, in community property states (22 of the states are, including NH), where property acquired during marriage is the community property of both spouses, the property’s entire basis is stepped up when one spouse dies. This is a question for an attorney as to the laws in your state and the specific nature of the holding of your home.

Plus state tax considerations, if any.

[ApS]

Originally Posted by jeffk

I'm not a tax expert and being a spouse changes the inheritance process but I will lead with a couple facts and then speculate. First, it depends as to where you reside as to the state inheritance tax and I won't have anything to say about that beyond that NH does NOT have an inheritance tax. Second, the federal exemption on an inheritance is almost $13 Million in 2023 and is indexed for inflation so it continues to increase. Now the speculation,

...if you jointly own a home with rights of survivorship, a common situation, when your spouse dies, you "inherit" their half. If their half is less than $13M (total of ALL their wealth), there is NO federal capital gains tax on the inheritance. Further, the value of their half of the property is set to the value at their time of death. You should get a couple of official estimates on the property ASAP to set the value. If you sell the property, half the purchase valuation is now reset to the current amount. If you give it to your kids at the time of your spouses death, their purchase valuation is now current value for the spouse's half but original purchase value for your half. However, if you pass it along at your death, your estate ALSO gets a $13M exemption and your half of the valuation of the property is ALSO reset to current value. THEN if your kids quickly sold the property, the taxable valuation would be any growth since your spouse died on half of the sale and effectively $0 on your half. Apparently though, in community property states (22 of the states are, including NH), where property acquired during marriage is the community property of both spouses, the property’s entire basis[ is stepped up when one spouse dies. This is a question for an attorney as to the laws in your state and the specific nature of the holding of your home. Plus state tax considerations, if any.

Just a fine point, but "Right Of Survivorship" can exist among family members--or anybody else.

[C-Bass]

Originally Posted by Sue Doe-Nym

I guess my question wasn’t completely hypothetical, though that was my intention. We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better? In a perfect world, the property would pass on to the next generations, BUT the surviving spouse might choose to sell for a variety of reasons, not always related to money or disability. Loneliness could be a huge factor. Anyhow, interesting subject. Thanks.

If the reason for selling is not for money or health reasons, you may consider letting the next generation take over the responsibilities for the property if they are willing. For the most part the next generation will never be able to afford to own waterfront. The bar is set far too high for middle/higher income earners to ever be able to afford to live on the water. The people who can afford waterfront right now are the very wealthy and everyone else is shut out.

[Descant]

Originally Posted by C-Bass

If the reason for selling is not for money or health reasons, you may consider letting the next generation take over the responsibilities for the property if they are willing. For the most part the next generation will never be able to afford to own waterfront. The bar is set far too high for middle/higher income earners to ever be able to afford to live on the water. The people who can afford waterfront right now are the very wealthy and everyone else is shut out.

I agree with this, since it has worked well for our family. We transferred ownership to a realty trust in 1986. Gifts over a couple of years, so no tax at that time. Since then, three of the original shareholders have died, and two gave their shares to a younger generation. There are several provisions to prevent personal gain by sale.

When you draw up an initial plan, it is worthwhile to go to another firm and pay for a couple of hours for a second opinion. Emphasis on "another firm".

[FlyingScot]

Originally Posted by Sue Doe-Nym

We have gone the trust route, but the dialogue that runs through my mind involves “what ifs “ and which route would be better?

Having just been chastised, correctly, for my glibness, I will be more careful. But...

In certain trust situations, there is no step up at death. (In plain English--in these situations the Trust owns the house and the Trust is still "living", so...) You should ask your professional about this to see if it applies to your trust