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Last Login: 11/9/2006 1:59:09 PM
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The results of a trust mill and no follow up after death as a result of no CPA or attorney relationship: Residence is 68% owned by bypass. Assume home has appreciated about $100,000 since funding to bypass. What can you do to remove it creatively to get the step up in basis on death of the surviving spouse and not paying income taxes now? How about buying it with a note due to the bypass. Payment and deferred interest is due on sale of home. We would use the lowest AFR as possible. How about a self-cancelling installment note? I think this would be easier if it was done earlier, before it had appreciated, but .....*&%$ .... Creatively Dreaming? Glenn Hammill Walnut Creek, CA
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| Hello Glenn: I often recommend that my clients initially fund the Bypass Trust with a percentage of the residence and then have the survivor buy it back as soon as possible (to avoid gain) for an interest only loan set at the AFR. The loan must be secured by the residence in order for the interest the spouse pays to the trust (and receives back as income) to be deductible on form 1040. The positiives are: the house will qualify for the 250k exclusion, only one check can be used to pay property taxes and other residence upkeep. The survivor is generally happier because they own the entire home. The negatives are: you've taken appreciation out of the Bypass Trust and there may be gain on the initial sale since you're doing it on a delayed basis. Use the AFR for interest, use a term loan as opposed to a demand loan. There has been no prop 13 revaluation when we've done this. Probably because the residence was owned by the trust before the transaction and the trustee are the same before and after the sale. An attorney we probably both know here in Danville has done many of these sales/notes. Regards, Mary Kay
Mary Kay Foss
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| That was fast, thanks. The problem here is that the house has already appreciated. Thinking out loud ......... what happens at death of surviving
spouse? The estate has a liability due to bypass. House sells and you pay
the interest with the principal. Her trust takes an interest deduction
- note is secured and recorded. Bypass trust has interest income.
Both terminate same time hopefully. Interest should be a wash to
beneficiaries on K-1's. Right?
The only gain to report in bypass is $100K. The payment of the note
is installment gain since the sale price is $100K higher than the
basis.
Makes sense, right?
Is the SCIN a pipe dream? I have not researched it... and don't want to on Friday, March 24th at 5pm! Glenn
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| When the surviving spouse buys the house for an interest only loan, you must pay the interest currently. When the house is sold, the Trust gets the principal plus interest accrued from the last annual interest payment date. The interest income and expense offset each year, first by the survivor and then by the beneficiaries when the survivor passes away. With the house having appreciated, the trust will recognize gain. If you're using an interest only loan, I suppose that you can defer the gain until the loan is paid off when the house is sold. Capital gain rates might be higher then. It might be better to have some principal payments made on the loan and get the tax on the gain out of the way. SCINs usually work best when they're set up immediately after the first death so there's no capital gain. You also need a higher than average interest rate to repay the seller for the possible loss of principal, I'm not sure how you determine an interest rate like that. Has anyone else done one?
Mary Kay Foss
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Mary Kay Foss (3/24/2006)
Hello Glenn: I often recommend that my clients initially fund the Bypass Trust with a percentage of the residence and then have the survivor buy it back as soon as possible (to avoid gain) for an interest only loan set at the AFR. The loan must be secured by the residence in order for the interest the spouse pays to the trust (and receives back as income) to be deductible on form 1040. The positiives are: the house will qualify for the 250k exclusion, only one check can be used to pay property taxes and other residence upkeep. The survivor is generally happier because they own the entire home. The negatives are: you've taken appreciation out of the Bypass Trust and there may be gain on the initial sale since you're doing it on a delayed basis. Use the AFR for interest, use a term loan as opposed to a demand loan. There has been no prop 13 revaluation when we've done this. Probably because the residence was owned by the trust before the transaction and the trustee are the same before and after the sale. An attorney we probably both know here in Danville has done many of these sales/notes. Regards, Mary Kay Mary, So how would transaction actually work if the client pays the interest during the year? Also, if there is appreciation can it be split between the bypass trust and the surviving spouse? Thanks
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| I'm not sure that I'm understanding your questions. If the residence is purchased for a note, interest should be paid. If the spouse is the beneficiary of the trust, he/she pays the interest and then receives the income back. On the 1040 it would be schedule B income and a schedule A deduction. Of course, the note has to be secured by the residence. If the spouse originally owned 32% of the residence and buys the 68% that the trust owns, I don't see how the appreciation on the purchased portion can be split with the survivor. He/she is doing the purchasing and will have a basis equal to the purchase price.
Mary Kay Foss
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