Buying a second home can provide you with a place to relax, unwind, and escape from it all. It can also provide you with substantial savings if you take advantage of these tax benefits of buying a second home.
Mortgage interest paid on up to $1.1 million in debt on your first and second homes is usually deductible. Typically, this rule only applies if you treat your second home as a home and not a rental property. But some mortgage interest may still be deductible if you occasionally rent out your second home. To benefit from this deduction under current tax law (it changes), you must use the property for 14 days or more than 10% of the number of days you rent it out a year, whichever is longer.
You can take up to $500,000 in profit from the sale of a home tax-free if it is your primary residence and you meet the two-year ownership and use requirement. Typically, you do not get the same tax benefit from the sale of a second home. But people have taken advantage of this rule by converting their second home to their primary residence before the sale, thus reaping the tax-free profit.
But in 2009, Congress added a few more restrictions to limit the amount of tax-free profit you can take from a second home. Now, a portion of the profit from the sale of a second home is taxable. The portion is determined by the ratio of the amount of time after 2008 you treated the residence as a second home or rental property and the amount of time you owned it.
Buying a second home can offer many benefits. But to maximize the value of your investment, work with a lawyer to make sure you are not overlooking any potential legal, insurance, financial, or tax problems or opportunities. You must meet other requirements—such as living in the home for two years before you sell it—to take advantage of some of these tax benefits.
A Personal Family Lawyer® can help you ensure you meet the requirements, so you can reap all the benefits of owning a second home.
Contact us today!
Call at 919-883-2800 or schedule an appointment.
Here are some thoughts from St. Jude’s Children’s Hospital:
Does your will need updating?
If you need to update your will, there is no substitute for using a qualified attorney with estate planning experience in your state. A knowledgeable attorney can make sure that your revisions are properly recorded, which can reduce expenses and help heirs receive their inheritances sooner.
An article recently published by WealthCounsel addresses the use of Asset Protection Trusts. Technically, they discuss self-settled trusts, in which your assets are used to fund the trust and you retain a beneficial interest. We can’t do that in North Carolina exactly that way, so we use a version that irrevocably transfers those assets out of your name and interest and the trust makes your family and children the beneficiaries.
Both strategies are important estate planning tools. In our experience, the irrevocable asset protection trust is an essential part of estate planning even if you are not worried about VA benefits or Medicaid… there is still a place for planning wealth transfer to your heirs in a controlled, predictable, and protected manner.
If you’d like more information, check out this article. And, give us a call to discuss your estate planning needs. You will find us to be caring compassionate attorneys, passionate about Estate Planning and Elder Law, and focused on VA benefits and Special Needs Trusts.
Preparing a will or a trust is central to an overall estate plan. Of course, there are lots of other documents too, but for the moment, what goes into the Will and Trust? Answers to our questions … based on planning and thinking about the future; planning for both while you are alive and after you die.
We ask a lot of questions. Some are about you, and others are about your family. How do you want to be treated? How do you want to have your family protected? What would you like to leave them? Do you have people in your life who need special gifts? Or, special provisions?
These are hard questions … some have no immediate or easy answer. We are patient! It might take a revision or two to get it all the way you want it. Don’t worry about all the details we ask about and subsequently put into the wills … everything is important. If you don’t define it now … someone will argue about it later!
A recent example of this is the Robin Williams estate. You can find a write up about it here and there on the Internet. The second article is a great argument for the use of trusts in estate planning. One question that is asked is if a renovation is considered upkeep on the house. The question is, what doyou want it to mean? We help define everything so that your family doesn’t have to argue about it after you are not there to help answer the questions.
Whomever you work with should be as detailed as possible. So, we have to ask a lot of hard questions! You won’t find our questions in an on-line will package. And, if trusts are right for you even if you do not have an estate like Robin Williams, we are sure to include that planning in your overall estate plan.
Beneficiary designations are an important part of our estate planning practice. We review these with our annual maintenance clients every year. If you don’t do it already, you should engage a competent attorney to assist you with your estate plans.
In part 1, we wrote about life insurance beneficiaries. In this part, we continue our mini-series about mistakes in planning related to beneficiaries. This part discusses special needs trusts and a very short summary of IRA issues.
A. So, how do you protect heirs and children with special needs? Can I just leave them a part of my estate?
Many families have one or more special needs person. A child with a disabling physical problem is easy to recognize as having special needs, but there are other serious illnesses that are not so obvious, such as substance abuse. As the person with assets, and decisions to make about life-time care for your loved one, you may wonder what can you do to protect her from the financial effects of her illness?
One way well- intentioned family members approach this is to designate the special needs individual as beneficiary of life insurance or other financial products, or as heirs of an estate plan. It is what most people would do. But wait! This might not work out as well as you’d like. You could create several kinds of problems, including loss of public benefits and loss of the asset through mis-management.
First, your good intentions may disqualify the special needs child or troubled adult from various benefits and governmental assistance. Many people with serious medical or mental conditions are receiving Supplemental Security Income (SSI) or disability income (SSDI). Some are on Medicaid or other local benefits. Your gift would likely put them over the asset limit and cause loss of benefits. That isn’t what you wanted!
Second, your gift might be simply taken by creditors, or unwisely spent by the recipient. You probably would like to help with housing or food costs for your troubled child or grandchild, but not to fund continued abuse or to provide a windfall for a creditor!
You can work this out by seeking the help of a qualified attorney who understands the needs of the families with loved ones with disabilities. Careful attention to the details in your specific case will make the best outcome. You can use a “supplemental needs trust” (“SNT”) or special accounts that support the child if you cannot. The best approach is to integrate your desires with the child’s parents’ planning and possibly use the assets to fund a special (or supplemental) needs trust.
A SNT is like other trusts, but with unique provisions. Like other trusts, a trustee is named to manage funds on behalf of the beneficiary. But, in a SNT the trustee is required to consider the effect any distribution would have on the individual’s entire need. If giving the child money for rent would affect eligibility for Medicaid or SSI, the trustee has to consider that and protect the beneficiary.
A SNT is a great way to protect a child with disabilities, or a troubled adult heir who can’t manage finances on his own. But, this approach requires careful planning. See a qualified attorney for help! We regularly help our clients protect heirs, spouse, and others during their lifetimes and as part of a comprehensive distribution of wealth through their estate plans.
B. IRA designations should be easy… I just list beneficiaries for the IRA, right?
Well, not really! IRAs require an entire course to understand their unique issues. But, here are a couple of important points… IRAs are often qualified investments, meaning that taxes are not yet paid (they are “tax deferred”). Taxes are due when the assets are taken out of the IRA. The goal in a gift of the IRA should be to provide the eventual recipient the maximum flexibility in handling the divesting of assets and in paying the taxes. Here are some key points:
Failure to handle IRAs correctly will cause problems and could result in loss of all those tax benefits! Seek a qualified financial planner (you can look for certifications, such as CFP) or tax attorney for this complicated area.
Review Part 1 of this series – Beneficiary Designations
Look ahead to the next part, Part 3 – Estate planning coordination.
On December 16, the US Senate passed important new legislation which included a variety of important tax provisions. Included is the “ABLE Act” which creates tax-favored accounts for children and adults whose disability occurred before age 26. Some additional web sites to review this are NDSS and the ARC and Autism Speaks.
The ABLE Act allows these tax-favored accounts to receive up to the annual gift tax exemption (currently $14,000 per year). Beneficiaries are restricted to one account, but anyone could contribute to their account. Modeled after 529 college savings accounts, ABLE account programs will need to be implemented by the states.
According to the Congressional Budget Office, “assets in an ABLE account and distributions from the account for qualified disability expenses would be disregarded when determining the qualified beneficiary’s eligibility for most federal means-tested benefits. For SSI [Supplemental Security Income], only the first $100,000 in each ABLE account would be disregarded.”
This provides important new options for parents with children with disabilities. We will provide updates as needed for our clients.
The Senate passed the ABLE Act as part of the Tax Increase Prevention Act of 2014, also known as “tax-extenders,” a bill that includes a variety of extensions for temporary tax provisions.
The IRA updates include a one year extension of expired tax provisions retroactive to January 1, 2014. This reauthorizes the IRA charitable rollover through December 31, 2014. Donors age 70 1/2 and older may transfer up to $100,000 from their IRA to a qualified public charity. The transfer will be made free of federal income tax and the gift qualifies for the donor’s 2014 required minimum distribution (RMD).
Because your window of opportunity is short for making IRA rollover gifts, we recommend that you contact your financial planner or tax adviser immediately. Keep in mind that it often takes IRA administrators several weeks to process rollover transactions. In order to complete the gift by year end, you need to act right away.
No one gets married expecting to get divorced … but it happens to about half of all first marriages*. And, if divorcing, the marriage only lasts an average of about eight years. Then, about 60% of divorced people remarry. Well … that makes it possible for several people to have some degree of claim over each other’s estates and for a variety of different claims by children of each of these marriages.
What could happen? Well, according to stories we have heard, just about anything! Here is one extreme example … in 1980, Peter Sellers (actor, Pink Panther) died of a heart attack. He was in the middle of divorcing his fourth wife (Lynne Frederick), but he had not quite gotten around to changing his will. He allegedly wanted to leave his estate to his kids … but, he didn’t actually change the will. The entire estate went to the almost divorced wife, and a mere token (nothing) to the kids. The difference was something like $6 million.
Is there anything YOU want to change now?
We suggest that divorcing couples separately change a number of aspects of their estate plans (see below). Ask your divorce attorney to suggest an estate planning attorney to help you do this. Don’t leave it to an on-line system that can’t account for your real needs. If you would prefer, just give us a call, and we will help you get peace of mind with this part of the pain of divorce.
Here is the list we suggest: