We’re learning a great deal of things from the announcement of Joe Paterno’s death. Some people will refer to his long time in college athletics, while others will tear him down for looking the other way during a horrible child abuse case — as they well should.
However, very few people will think about the financial decisions that Joe Paterno has made, which includes a rather interesting strategy that involved transferring the house he called home back in July to a trust. The sale of the house was done for a dollar, which tends to be pretty standard. However, could it really come back to haunt the family? That’s what we’re looking at today.
What matters here is that when it comes to taxes, inherited assets are entitled to an adjustment in basis to their value on the date of death. In the case of the Paterno’s, the house appreciated greatly so there was a lot of value. The house in question was bout for $58,000 way back in 1969, and it’s worth $594,484. That’s a lot of value!
However, the law allows everyone to exclude up to $250,000 on the gain of a sale of a home as long as we meet certain conditions. The Paternos would have easily met those conditions had Mr. Paterno lived out the entire tax year.
As it stands, Mrs. Paterno can only do her 250,000$ exclusion, but not his — so there would still be capital gains tax on the difference of $286,484 (now that we subtracted just her exclusion). If she had done it a different way — jointly owned with her husband — she could have used her husband’s exclusion as well.
Confused? Many are when it comes to this form of tax planning and even estate planning. So let’s go with another example.
What if you bought a really old Southern estate for $100,000 a long time ago with your spouse, just because you liked it? It’s now worth $1 million because of the rapid development around your area, but your spouse has just received a devastating diagnosis — they have cancer, and it’s beginning to spiral out of control. They’re expected to only live two more years. What happens now?
Well, assuming that you transfer your share of the house to your spouse, and then you inherit it back when they pass on two years later, there won’t be any capital gains at all. This is because you are assuming that you will sell it for at least the value of the house, or a little less. So there wouldn’t be any necessary “gain”, because you would be receiving the step-up value of the property. If you did it a different way, you would have to take the $900,000 in appreciation as a “gain”, and then only be able to exclude your $250,000.
What about estate taxes? Well, married couples are in luck again — if you get assets from your spouse after their death, these are not subject to estate taxes.
There are a lot of things that come into play when it comes to estate planning, estate taxes, and financial life after the passing of a loved one. However, what we need to learn from here is that it’s so critical to get these details right. Going off what you “feel” is right isn’t going to win the day. You have to make sure that you really do know what’s going to happen from start to finish. Only then can we actually get things done in a big way.
The time is right to sit down with an estate planning expert or your accountant to really make sure that you have a finer working of what’s really going on around you, not just today but also deeper into the future. Start now!