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Estate planning can be a difficult subject, but it's
important to
look forward, so you can make sure your family is in the best
position for their future.
Outdated Planning Results in a Heavy Tax Burden
We recently assisted the family of a husband and wife who owned
land in Iowa as tenants in common. This means that each party owned
one-half interest. The husband had passed away 20 years ago, and
upon his death in 1989, his one-half interest was stepped up to
fair market value. This one-half interest was transferred to his
children, and his wife received a life estate. The children's
basis in the one-half interest was the 1989 value.
In 2018, the wife passed away, and her one-half interest was
stepped up to full market value at her date of death. The children,
in conjunction with the personal representative of their mom's
estate, sold the land in 2018. The one-half interest owned by the
children (as remainder interest in their dad's share) did not
receive a basis step up on mom's date of death, and as a
result, the total federal and Iowa income tax paid was
approximately $350,000.
What Went Wrong?
While the planning used in 1989 for ownership of the farmland
was typical of the planning used at the time, a lot has changed in
the last 20 years. For example, the 2017 Tax Cuts and Jobs Act
increased the federal gift and estate tax exemption from $5 million
to $10 million indexed for inflation, making
lifetime gifts a great strategy to consider. Even if you and
your family have an estate plan in place, it's important to
periodically review the plan to make sure you aren't missing
out.
If the children had consulted with an estate planner or set up
real-time monitoring regarding their parents' assets, they
would have realized that they should have considered transferring
their remainder interest in their dad's one-half interest to
their mom. That way, their mom would have owned all the land at her
date of death, and the entire basis would have been stepped up to
full market value at her date of death. If this had been the case,
there would have been no gain to report on the sale. Also, with the
increased exemption available to the surviving spouse, there would
have been no additional federal or Iowa estate tax due.
A financial advisor would also have outlined the inherent risks
of this new plan and analyzed whether these risks worked best with
the family's
goals and objectives. If the children had opted to give their
mother the remainder interest, there's always the chance that
their mom could have decided not to give the kids the land back to
them, or not give it back to them in the same proportion. Also, if
the mom had creditor issues, part of the land would have to be used
to satisfy creditors—including nursing homes and other such
care. Risks such as these are an important piece of the big-picture
consideration.
How Can I Plan for My Future?
A
comprehensive wealth plan can help you examine pros and cons,
take advantage of exemptions and look at your estate as a whole, so
you can see that big picture. Sitting down periodically with a
professional to review and discuss plans is always
beneficial—not only for your own sake, but also to make sure
your family is protected in the future.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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