DEAR BENNY: I have a question concerning taxes on my mother’s estate. She is presently living in a retirement home and a decision is necessary concerning her home.
My father is deceased. There is a trust agreement, along with a will. My mother and all three siblings are co-trustees on the trust and listed as beneficiaries on the will. I understand a trust agreement supersedes a will. The home is now owned by my three siblings … my mother (has) right of survivorship. My question is: When is the best time to sell the house in regard to taxes?
I have been told that when my mother dies the house will become a part of the trust estate and that the taxes would be less. My mother has other assets, so she does not need to sell the house, but it is now vacant. Renting is not a preferred option, as the house is 50 years old. My mother, sister and I would like to sell it now, but my brother does not agree because of the tax question. My mother’s entire estate is under $1 million. –Betty
DEAR BETTY: You state that the property is owned jointly with your mother. If that is the case, then the house is not included in the trust. Only assets that are titled in the name of the trust or assets that "pour over" into the trust are governed by the provisions of the trust agreement. ("Pour over" is a highly technical concept that must be explained by your own attorneys.)
In this case, neither will happen if the property is still owned jointly. The property will pass to the surviving owners when your mother dies. You all will receive a stepped-up basis in your mother’s one-quarter share of the property.
The basis of the rest of the property will be the mother’s basis at the time of the transfer. Again, the specific details and financial issues must be reviewed and discussed with your own financial advisers.
However, you did not say whether your mother lived in the property for two out of the previous five years. If so, and you decide to sell the property while she is alive, the gain on your mother’s share of the property — up to $250,000 — would be excluded.
The share of any of the children who have not resided in the property for two out of the previous five years would be subject to capital gains tax. So the income tax consequences would be the same, assuming the mother is currently entitled to the $250,000 primary residence exclusion, whether you sell the property now or wait until she dies.
In any case, because the property is not in a trust, it is only the tax consequences on your mother’s share of the property that would be any different if you sell now vs. later. You might want to discuss with your advisers if it makes tax sense to put the property in a trust. However, your mother must be mentally competent in order to accomplish this.
As for estate taxes, you have not disclosed the value of the real property or the value of your mother’s other assets. We also do not know what state your mother lives in and what those estate tax laws provide. State laws differ.
But for federal tax purposes, your mother’s entire estate is less than $1 million. Accordingly, based on current tax law, her estate would not be subject to estate tax. Under the recent tax bill enacted by Congress, the estate tax exemption is $5 million. (If your mother had died in 2010, her estate can either pay no tax and use the $1.3 million in basis to apply to her assets or the estate can claim up to $5 million as exempt, so there would be no federal estate tax whether she died in 2010 or this year.)
But this is only general information. Readers should not rely on such advice but must review their specific situation with their own legal and tax advisers.
DEAR BENNY: We own an oceanfront condominium. The HOA sued the developer for construction defects and has a $3 million judgment. Unfortunately, the developer is "judgment proof" and long gone. He had no insurance.
His hard-money lender got a court-appointed receiver, who is marketing the remaining unsold units. The lender then paid the developer $80,000 cash, plus a promise of more money when the units are sold, for a proxy to vote those units and a power of attorney. The units are still in the developer’s name and a judge ruled that he could vote those units.
The lender, with the purchased proxies — and a few clueless owners — was able to take control of the HOA’s board of directors. His motives are not the same as the vast majority of owners. He wants fast and cheap repairs so he can sell his units and be gone.
We have lots of attorneys involved and there are many issues to occupy their time. My question is: Is it legal to buy and sell proxy votes? –Dennis
DEAR DENNIS: First — and I am not picking on you — you said you live in a condominium, but keep referring to "HOA." The latter is a "homeowners association," which is legally different from a condominium. Although governance is usually the same with both legal entities, my pet peeve is when people refer to their condo as an HOA, or vice versa.
You also refer to "clueless owners." They may be that, but they are owners. Community association living is democracy at its best — and its worst. So, if an owner wants to vote as he or she desires (or give a proxy to someone), that is his/her absolute right.
Not to inject a "politically correct" concept here, but it really is no different from when people vote their choice for president of the United States. That’s their constitutional right, regardless of whether you disagree with their choice.
To answer your question about selling proxies, while I don’t like the idea, I believe it is legal. However, you or your cadre of lawyers should carefully review the legal documents of your condominium (specifically its bylaws). There may be proxy restrictions there. For example, some documents restrict the number of proxies that any unit owner can hold.
You should mount a good old-fashioned political campaign to get as many unit owners to protest the decisions of the lender. In fact, if you can muster sufficient support among the owners, you may even be able to "throw the rascals" out of office and elect your own board of directors.
And keep in mind that even though the lender controls that board, it still has a fiduciary duty to act responsibly on behalf of you and the other owners.
DEAR BENNY: I am upside down on my home, which I purchased before getting married, and my spouse has not been added to the loan. Can I do the following without wrecking my spouse’s perfect credit: (1) engage in a short sale and default on the balance, or (2) declare bankruptcy? –Anonymous
DEAR ANONYMOUS: If you are not able to work out a modification with your lender, I see no problem with either approach. I would prefer the short sale over bankruptcy, however. You should keep in mind that when there is a short sale, many lenders still try to get the deficiency balance from you.
I assume, however, that you will discuss your options with your spouse.
(Note to readers: I will not respond to anonymous e-mails. But I will respect readers who provide their name and e-mail address but ask me not to publish that information.)
