San Francisco Chronicle, January 8, 2014
Today I have answers to questions on estate planning and the so-called family glitch in the Affordable Care Act.
Q: Scott L. asks, "I have a suburban condominium and a mountain cabin. Both properties are owned by a trust of which my four adult children and I are the co-trustees. When I pass on, should my children have these properties officially evaluated to serve as a basis for taxable gain when the properties are eventually sold?"
A: To be safe, yes.
If the properties are not sold while you are alive, they will receive a "step-up" in basis, which means the cost basis is changed to the market value on the date of your death. This is called a step-up because in most cases assets will have appreciated during your lifetime. But they also could be stepped down if they have depreciated.
If the value of your assets falls after your death and your estate is subject to estate tax, the Internal Revenue Service lets your executor choose, as the new cost basis, the value of your assets six months after death. This so-called alternative valuation is rarely used anymore because so few estates are subject to estate tax. People dying in 2014 can leave up to $5.34 million (including gifts made during their lifetime that exceeded the annual gift tax limit) before estate taxes apply.
When the properties are sold, any capital gains tax that would be paid by the trust or the beneficiaries would be based on the difference between the sales price (minus sales-related costs) and the new cost basis.
Suppose you paid $200,000 for the two homes combined. Upon your death, they are worth $500,000. A year later, they are sold for $600,000. The capital gain would be $100,000 minus sales costs, says Dennis Sandoval, education director with the American Academy of Estate Planning Attorneys.
The IRS wants a valuation from an appraiser, rather than a market evaluation from a broker, Sandoval says. But "a lot of people don't do that."
If the heirs plan to sell within a few months and prices are not moving rapidly, they figure the sales price is the market value as long as it's sold to an independent party. "In that case they might get a market evaluation or nothing at all."
If your children fail to get an appraisal and sell many years later, they can still get an appraiser to determine the date-of-death value, but it will cost more than if they do it right away.
If your children plan to rent out the property, they should get a formal appraisal so they know how to calculate depreciation, Sandoval adds.
Q: Edward M. writes, "I am the executor of an elderly aunt's portfolio and co-trustee on her revocable trust. The value of her estate - mostly stocks - is around $1.5 million. Her trust designates a percentage of the total value of the estate be given to a number of individuals, not specific assets.
"If the trust sells the stock after her death and distributes the cash to beneficiaries, does the trust pay capital gains on the original cost basis or can it use the step-up at time of death? There is no cost basis for a number of stocks because an uncle transferred brokerage accounts frequently and all his records were lost."
A: If this is a revocable living trust, the type most people use for estate planning, the stocks would receive a step-up in basis as explained above.
As to who would pay the capital gains tax - the trust or the beneficiaries - it would depend on the timing of the sale versus the closing of the trust administration.
If the stocks were sold in the same year the trust was closed out and distributed to beneficiaries, the beneficiaries would pay the tax. If the stocks were sold and distributions made in a different tax year, it is likely the trust would pay the tax, Sandoval says.
Victoria Kaempf, an estate attorney with Lakin Spears, notes that in this situation, "it would not be uncommon for the trustees to sell the stock after the aunt's death to simplify the trust administration and allow for a distribution of cash rather than securities."
Losing track of records "is a common story and is one of the reasons that the basis adjustment rules are still with us today," she adds.
If the trust in question is irrevocable, "you need more information as to whether it gets a step-up or not," Sandoval says.
Q: Nancy M. writes, "My husband and I have medical insurance through my employer, who works with a broker. I believe that my family of three (including a son who has insurance through college) qualifies for a Covered California premium subsidy.
"The broker is trying to scare me out of enrolling, which I have already done and have a case number, by saying that because I have employer-offered coverage and our premium does not exceed 9.5 percent of my income, we are not eligible for discounted premiums. Our 2012 gross income was $61,200 and our 2014 income will be close to the same."
A: Your broker is wrong in one respect but could be right in another. To qualify for a subsidy on Covered California, your modified adjusted gross income must fall between 138 and 400 percent of poverty level for your household size.
For 2013, the upper limit is $78,120 for a family of three (assuming you claim your son on your tax return) or $62,040 for a family of two (if your son is not a tax dependent).
However, even if your income is below that limit, you will not get a subsidy if your employer offers health coverage and your share of the premium for employee-only coveragedoes not exceed 9.5 percent of your household income.
In this case, if Nancy would have to pay no more than $484.50 per month to cover herself only, she will not get a subsidy because she is deemed to have affordable coverage at work.
If her employer plan is deemed affordable and offers coverage for a spouse, her husband also would be ineligible for a subsidy - no matter how much spousal coverage costs and whether or not he takes it.
Suppose Nancy's employer would take $200 a month out of her paycheck if she covers herself only or $800 a month if she covers herself and her spouse. Because her coverage is affordable, "he would be deemed to have an offer of affordable coverage and be ineligible for subsidies, even if he is not enrolled in the plan," says Laurel Lucia, a policy analyst with the UC Berkeley Center for Labor Research and Education.
This not-uncommon situation is nicknamed the family glitch, Lucia says, and is "not consistent with the spirit of the Affordable Care Act."
If Nancy gets a subsidized policy through Covered California and is later found to have affordable coverage through work, she could have to repay all or some of the subsidy.
Subsidy repayments are capped on a sliding scale based on annual family income. For example, if income is between 300 and 400 percent of poverty, repayment is capped at $2,500 per family and $1,250 for individuals. If it exceeds 400 percent, the subsidy must be repaid in full.