Making a Will is an extremely common concept. You own stuff and you want to make sure a certain person or persons get that stuff when you die. What’s not commonly considered, however, is what will happen when that transfer of assets takes place. There’s some good, there’s some bad, but all are things you should be aware of.
The “Oops” Transfer
Let’s say you’re a gun owner. You’ve purchased a couple firearms over your lifetime that are good quality and will serve as part of a decent inheritance. Let’s say you want to leave on or all of these firearms to your son Chuck. Now Chuck was a little wild growing up. He and his buddies got popped in high school by the local Sheriff for driving around in the bed of a truck, smashing mailboxes with a baseball bat—a state and federal offense. Now Chuck, as the main perpetrator of the smashing, got charged and convicted of a felony. Chuck cannot legally own or possess a firearm because of this felony. If he is found to be in possession of a firearm, he is in big legal trouble.
What was originally a gift out of the kindness of your own heart, turned into another felony charge for ol’ Chuck. . . Oops. What could have been done? Well, a little preplanning would have allowed you to set it up so that the firearms go to someone else or to be held in trust until Chuck gets his rights to own a firearm back.
Let’s say you own a home with a mortgage. You refinanced a couple time and refurbished a couple rooms in the home. So, your mortgage is pretty high. High enough that you may not pay it off during your life. Let’s say you pass away and leave the home to your child still owing $60,000.00 on the mortgage. What happens to it?
Well, it’s no surprise that somebody has to pay it. In this case there is really two options: 1) Maybe you had insurance on the mortgage such that if you died owing a balance, the insurance would pay that balance so that your heirs would not have to. Most people do not have this type of insurance; 2) If you don’t have mortgage insurance, then the beneficiary who received the property must pay it. It is important to note that the beneficiary is not personally liable for the mortgage. But, if they want to keep the home, it must be paid. Also, if they sell the home, part of the proceeds must go toward paying off the mortgage.
Finally, the beneficiary has the option of refinancing. If they do, they will become personally liable for the mortgage. This really is not a great option unless the beneficiary can get a better rate and/or the beneficiary wants to get some of the equity out of the property.
Death and Taxes
What are the tax implications of dying? Well, there’s a few but I’m going to focus on one: basis. Okay, we’re gonna get technical here, so stay with me. Let’s say you bought a vacation property for $100k. Your basis in that property is $100k, what you paid. If you sold that property for $300k, you would have a gain. The gain is the difference between the basis ($100k) and the profit ($300k). Thus, the gain here is $200k. You would be required to pay capital gains taxes but only on the gain. So, here you would apply your capital gains rate (let’s say 15%) to the gain of $200k. The capital gains tax would equal $30,000. Quite a large chunk of change.
Let’s say you decide to give that property away during your life. The person who receives the property will have the same basis you have and will suffer the same tax consequences if they sell the property. However, if you were hang on to that property and your beneficiary were to receive as an inheritance, they get a “step-up” in basis. This means that their basis in the property will be fair market value at date of death. That eliminates all the gain built into the property. And, unless the property appreciates significantly, there will be little to no tax consequences of selling the property once received.
A little bit of preplanning can prevent the assets you leave behind from being a burden. I f you have questions, call the experienced attorney at McIntyre Elder Law: (704) 259-7040.
Brenton S. Begley
Elder Law Attorney
McIntyre Elder Law
“We help seniors maintain their lifestyle and preserve their legacies.”
PO Box 165
Shelby, NC 28151-0165