A believer in continuing professional development, Eric Dostal obtained the CERTIFIED FINANCIAL PLANNER™ Professional (CFP®) designation, and graduated with a JD from St. John’s University School of Law. Eric recognizes the challenges investors face when planning their retirement and therefore he helps clients retire when and how they would like. Eric focuses primarily on providing affluent and high net worth individuals with expert, comprehensive and impartial financial planning advice to help those individuals achieve their unique life goals.
After joining Sontag Advisory in 2013, Eric has worked extensively with clients over the past 4+ years to create and implement their unique financial plans. Eric has demonstrated a high degree of skill developing and overseeing the investment, insurance, retirement, tax and estate planning strategies of his clients.
Eric currently lives in Merrick, New York with his wife Jamie and daughter Madeline. When not in the office, you can often find him spending time with family and friends. He also recharges by sitting down with a good book and honing his culinary skills.
JD, St. John's University School of Law
B.A. - History, SUNY Geneseo
The tax impact of the sale of the home will depend on the type of Trust your Mother established.
If the Trust was a Revocable Trust then the home was likely includable in your mother’s taxable estate. If that is the case, at her death the home received a step-up in cost basis. This means that the cost-basis of the home reset to the home’s market value as of your mother’s date of death. As a result, there would likely be very little, if any, taxable gain for you to report as income.
Alternatively, if the home had been placed in an irrevocable trust, like a Qualified Personal Residence Trust, before your Mother’s death it likely would be excluded from her taxable estate and therefore, not receive a step-up in cost basis. The difference between what was paid for the house and what it was sold for would create a capital gain. If the proceeds were then distributed from the Trust to you and your brother you would each pick up that taxable gain on your personal income tax return.
The IRS divides loans into three categories based on their term: short (less than 3 years), mid (3-9 years), and long (more than 9 years). An “applicable federal rate” or AFR is published each month, by the IRS, setting the interest rate for each of the three durations. For example, the Long-Term AFR rate is 2.6% for November 2017, which is the minimum amount of interest you could charge for a loan with a term longer than 9 years.
The income tax consequences of an intra-family loan depend on who the lender and borrower are. If both the lender and borrower are individuals, as opposed to a trust or corporation, then the interest on the loan is income to the lender and must be reported on his or her income tax return. It sounds like you may be trying to lend the funds from a Roth IRA as an “investment” to avoid recognizing the interest payments as income. This may prove to be difficult to do because you are loaning funds to a family member which may run afoul of rules promulgated for permitted investments for Roth IRAs.
For a loat to be considered an intra-family mortgage, then the transaction must be properly recorded and documented in order to ensure deductibility of the interest payments made from the borrower to the lender. This is a common consideration when a family member wishes to provide funding for the purchase of a new home. There may be costs associated with drafting and then recording a mortgage with the county where the property is located. However, these steps are esential to allow for deductiblity of mortage interest. It is important to run an analysis to determine if the anticipated interest rate deduction from the mortgage will overcome the hurdle of paying the expenses associated with the mortgage recording. Typically, it does not given the low interest rate enviorment we find ourselves in.
An inter-family loan must be appropriately documented, by the creation of a promissory note, and payments must be made according to the note’s schedule. Failure to properly document the loan, and abide by its terms, may result in the loan being considered a gift by the IRS, which may have adverse Estate and Gift tax consequences depending on your situation.
The lender could be taking on substantial risk if the loan represents a large portion of their overall net worth. There is a chance that the borrower may default on their loan obligation and the lender needs to think about what would happen to them if this were to occur.
Life insurance, like any type of insurance, looks to transfer risk away from you and your family and onto an insurance company. In this instance, you are transferring the risk of your premature death. Think of it the same way as transferring the risk of injury from a car accident with auto insurance or the risk of loss of property from a house fire with homeowners insurance.
When having a conversation about life insurance, it is important to remember that life insurance should provide:
- Income replacement for a surviving spouse
- Financial support for dependents
- Payment of outstanding debts/final expenses
- Liquidity for estate taxes (if applicable)
You should transfer this risk at the lowest possible cost and via the most efficient methods. That is often provided by the “pure-insurance” offered by a term policy. The term of the insurance and the amount of insurance will depend on what you want the life insurance to provide from the list above.
Given the information you have shared, I would question if you currently have an insurable need. Do you have a spouse who relies on your income to maintain your current lifestyle? Who would benefit from the policy if you passed away? Do you have large outstanding debts that a loved one would be responsible for if you died? Are you looking to secure coverage now because you think it will be at a lower cost than if you wait until you have an insurable need? If the answer to the last question is yes I would advise you to take a look at www.term4sale.com and see what different amounts of coverage will cost at different ages. The difference probably is not as big as you think.
In the interim, you can take the dollars you would be using to pay an insurance premium and save them to help accomplish some of your other life goals.
Taxes will be owed to the extent that the proceeds from the sale of the home exceed the cost basis of the home. Who will pay the tax will depend on a variety of factors.
If your parents had placed their home in a Qualified Personal Residence Trust (QPRT) prior to their deaths, the cost basis of the home is likely whatever their cost basis was prior to the gift.
Alternatively, if your parent’s owned the home via a Revocable Trust, then the home may have received a cost basis step up as of their respective dates of death.
If you are planning on distributing the proceeds of the sale of the home out of the trust to the trust’s beneficiaries then they will likely pick up the tax impact on their personal tax return. This is a concept known as distributable net income and the trust will likely need to generate a K-1 for each beneficiary receiving a distribution.
Alternatively, if assets are not being distributed because of the term of the trust, the trust itself will likely need to file a tax return.
The mechanics of all of this can get complicated quickly, would recommend working with an accountant/attorney to make sure it is administered properly.
Married couples can elect to combine their annual exclusion amounts, call gift splitting, so that one spouse can give up to $28,000 per individual, without affecting his or her unified credit. Technically, a Form 709 should be filed to elect to gift split. A simpler alternative is for you to write a $14k check to your son and for your wife to write a $14k to your son. That would fall within the annual exclusion limits for both of you and no gift tax forms would be needed. Alternatively, one $28k check could come from a joint account in your and your wife’s name. A form 8300 is used for cash deposits of $10k or more received in a Trade or Business, not in a gifting situation.
Normally all a mortgagor would require is for you and your wife to sign a gift affidavit. A relatively simple process, which only becomes a problem if you are attempting to construct an inter-family loan and not a gift.