Businessman with Coat and Tie Holding House

“We have money in savings and retirement accounts, but our most valuable asset is our home. We want to leave our property to our two children equally.”

Treating everyone equally in estate planning can get complicated, even with the best of intentions. What if a family wants to leave their home to their daughter, who lives locally, but wants to be sure that their son, who lives far away, receives his fair share of their estate? It takes some planning, says the Davis Enterprise in the article “Keeping things even for the kids“. The most important thing to know is that if the parents want to make their distribution equitable, they can.

If the daughter takes the family home, she’ll need to have an appraisal of the home done by a certified real estate appraiser. Then, she has options. She can either pay her brother his share in cash, or she can obtain a mortgage in order to pay him.

Property taxes are another concern. The taxes vary because the amount of the tax is based on the assessed value of the real property. That is the amount of money that was paid for the property, plus certain improvements. In California, property taxes are paid to the county on one percent of the property’s “assessed value,” also known as the “base year value” along with any additional parcel taxes that have become law. The base year value increases annually by two percent every year. This was created in the 1970s, under California’s Proposition 13.

Here’s the issue: the overall increase in the value of real property has outpaced the assessed value of real property. Longtime residents who purchased a home, years ago still enjoy low taxes, while newer residents pay more. If the property changes ownership, the purchase could reset the “base year value,” and increase the taxes. However, there is an exception when the property is transferred from a parent to a child. If the child takes over ownership of the home, they will have the same adjusted base year value as their parents.

If the house is going from parents to daughter, it seems like it should be a simple matter. However, it is not. Here’s where you need an experienced estate planning attorney. If the estate planning documents say that each child should receive “equal shares” in the home, each child receives a one-half interest in the home. If the daughter takes the house and equalizes the distribution by buying out the son’s share, she can do that. However, the property tax assessor will see that acquisition of her brother’s half interest in the property as a “sibling to sibling” transfer. There is no exclusion for that. The one-half interest in the property will then be reassessed to the fair market value of the home at the time of the transfer—when the siblings inherit the property. The property tax will go up.

There may be a solution, depending upon the laws of your state. One attorney discovered that the addition of certain language to estate planning documents allowed one sibling to buy out the other sibling and maintain the parent-child exclusion from reassessment. The special language gives the child the option to purchase the property from the other. Make sure your estate planning attorney investigates this thoroughly, since the rules in your jurisdiction may be different.

Reference: Davis Enterprise (Oct. 27, 2019) “Keeping things even for the kids

“Congratulations! Your retirement planning paid off. You built a $1 million retirement nest egg. How long will $1 million last in retirement?”

For most retirees, the goal is simple: don’t run out of money. That’s the worry that plagues most Americans—61% of them, according to a survey from Allianz Life. How do you keep that $1 million from running out before you do, asks Investors Business Daily in the article “How Long Will Your $1M Last in Retirement?“.

Let’s use this example. A person is 65 years old, earning $115,000 annually. It’s not a king’s ransom, but it’s a decent income. They sock away a good-sized amount of money every year, but not so much that they reach income limits in a 401(k) or similar retirement plan.

The simple answer to the how long will $1 million last is less than nine years. That’s if the person spends $115,000 a year from the $1 million.

The average American life expectancy is now 78.6 years, as of 2017, according to the CDC. However, if you make it to 65, you’re more likely to make it to 20 more years. For the average person, that means living to around 85. Retirement funds in this case, which is admittedly an average, will need to last twenty years. Will they?

That nest egg isn’t done growing, just because you’ve turned 65. Given enough time, even including setbacks in the market, you’re likely to have a nest egg that keeps growing over those twenty years. If you use a 5.6% annual rate of return for forecasting how your portfolio will do, you may be in better shape than you thought.

A 5.6% return would grow your portfolio to $2.97 million, even at a 5.6% growth rate. However, that’s without subtracting any money for living expenses every year. Let’s plug that in.

You’ll be getting Social Security, so you won’t be taking out $115,000 every year. While the size of benefits may change in the future, there will still be income. For a 65-year-old earning $115,000, expect to receive about $27,815 from Social Security annually.

That’s $87,185 to maintain your current lifestyle, from retirement savings, any part-time income or other sources. Let’s say you don’t want to work, and it all has to come from savings. Don’t forget inflation, which will come in at some point. U.S. inflation is now 1.7%.

It looks like your $1 million will last about fifteen years now. Will that be enough? Downsizing to cut housing costs will help, as would part-time employment. You should also make sure that you have long-term care insurance to protect you and your family from one of the biggest health care costs.  However, people with $1 million can pat themselves on the back—well done!

Reference: Investor’s Business Daily (Oct. 28, 2019) “How Long Will Your $1M Last in Retirement?

For more information on asset protection and estate planning, please visit my estate planning website.

Mr. Amoruso concentrates his practice on Elder Law, Comprehensive Estate Planning, Asset Preservation, Estate Administration and Guardianship.