Dear Liz: I own several properties. I have a living trust that names my two minor children as beneficiaries. I’ve told my attorney that I want to transfer the properties to my children using the county form. This will give my children who are under 10 years of age ownership as tenants in common with the right of survivorship. I believe this avoids any tax consequences. I will still keep my living trust and make some adjustments per this change. My attorney states I will lose the step-up in tax basis if I do this. As I see it, this may not be a concern as my primary goal is to give my children these properties in the event of my passing. I do not trust anyone whom I name as trustee to my living trust. I do not care about the step-in-basis as doing it this way avoids delays, assures ownership and avoids possible fraud. The trustee could sell the properties and spend the money. Keep in mind my children are minors as of this date. Sure, they could file a lawsuit, but you need money to file an action and once the money is long gone, good luck in getting it back. This way it gives immediate ownership to my children, and I avoid these problems that may occur.
Answer: If you really don’t know anyone you can trust to look after your children’s interests, then you’ve got quite a dilemma.
Your children are too young to legally own real estate in their own names, so some kind of guardian or trustee would need to be involved in managing the property, notes Jennifer Sawday, an estate planning attorney in Long Beach. Plus, you have no idea now whether your kids will be able to responsibly handle such an inheritance once they’re legally allowed to take over at 18 or 21 (depending on the age of majority in your state). Few people that age are ready for such a big responsibility. If a child develops an addiction or spendthrift tendencies, they could quickly waste their inheritance.
Plus, transferring property can have huge tax consequences, including the loss of step-up in tax basis that your attorney mentioned as well as property tax reassessments. (In California, such transfers avoid reassessment only when a primary residence is transferred and the child continues to live in the home. Commercial property, rental property and vacation homes get reassessed upon transfer.)
If you have no friends or relatives who are ethical, honest and trustworthy, then you’ll need to consider hiring a professional fiduciary or trustee. Your attorney can discuss your options.
Dear Liz: I have a few questions about my income taxes during my upcoming retirement. I would like to know if doing a Roth IRA conversion will be worth it for me since I might be in a higher tax bracket when I retire. Is there a rule of thumb in regards to doing this conversion? I’m also getting considerable income from my tax-free municipal bond and money market fund. Will that income be taxable when I retire and will it count toward how the government calculates my Medicare premiums?
Answer: Rules of thumb can be incredibly helpful in many areas of personal finance. Guidelines such as “spend less than you earn” and “pay yourself first” apply to virtually everyone. Even more specific recommendations, such as the 50/30/20 budget, can apply to many if not most situations. (The 50/30/20 budget recommends limiting “must have” expenses to 50% of after-tax income, leaving 30% for wants and 20% for savings and extra debt repayment.)
As you enter retirement, though, you’ll be making decisions that may be irreversible. It can be much harder to rebound from mistakes and you’ll have fewer years to do so. That’s why it’s important to get individualized advice from pros you can trust.
Converting a regular retirement account to a Roth IRA can make sense if you expect to be in a higher tax bracket in retirement and can pay the taxes on the conversion without raiding the account. But the conversion also can trigger higher Medicare premiums.
The same is true for municipal bond interest. Muni bond interest typically avoids income tax, but will be included in Medicare premium calculations and may cause more of your Social Security benefit to be taxable as well.
A tax pro can advise you about these issues and offer strategies to lower your lifetime tax bills.
Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
