Inheriting a Home and Loan - New York Times

A recent interview with New York Times reporter Vickie Elmer inspired my post "What Happens to the Mortgage when Property is Transferred to Beneficiaries at Death?".   Vickie took some of my thoughts, and those of other attorneys and loan officers, to provide a framework to "Inheriting a Home and Loan".

Some points from the article to consider:

  • It’s like getting a gift with a string,” said Judith D. Grimaldi, a principal of Grimaldi & Yeung, an estate planning law firm in Brooklyn. Thirty-one percent of people 65 and older, in fact, have home mortgages, according to the Census Bureau. “Most of my clients just end up selling the house,” Ms. Grimaldi said, “taking the proceeds and saying, ‘Thank you, Mom.’ ”
  • The survivors, meanwhile, should look at the inheritance of property from a practical, economic perspective. “You need to look very strongly at whether you can afford to maintain the mortgage and maintain the property,” Ms. Wheatley-Liss said.
  • Although there may be some emotional attachment to the home, having [the home] appraised can help determine whether it’s worth keeping. “The question would always be: ‘Are you protecting equity?’ ” said Michael McHugh, the president and chief executive of Continental Home Loans in Melville, N.Y.
  • The survivors should contact the lender early on to let it know that the borrower has died and that they are the heirs, or the executor of the estate, and to determine the loan’s status. Mr. McHugh suggests sending the lender a copy of the death certificate and a letter from the estate’s lawyer.
  • It is also important to determine whether the deceased relative has stayed current on the property taxes, if they are not paid through the lender.

Image: jannoon028 / FreeDigitalPhotos.net

Excess Estate Expenses can be Windfall to Beneficiary

Who would have thought it, but the 1041 income tax return for an estate could make the beneficiaries money.  

Many times an estate may have deductions in excess of its income. An estate’s income would include any items of income earned by the estate from the time of the decedent’s death until the time that the estate is closed and a final income tax return is filed. These items of income are reflected on a United States Income Tax Return for Estates and Trusts (IRS Form 1041).

An Executor must file an income tax return for an estate (i.e. IRS Form 1041) each tax year for the estate where it has gross income of $600 or more or as a beneficiary who is a non-resident alien. The return is due April 15, like a personal income tax return.

There may be situations where an estate does not have significant income, but has significant deductions. The Executor has a choice of deducting certain estate administration expenses or losses on either the estate tax return (Form 706), or the estate’s income tax return (Form 1041). In a situation where it is not a taxable estate (for example, all assets are passing to the spouse, and there is an unlimited marital deduction) it doesn’t necessarily make sense to reflect the estate administration expenses on the estate tax return; there is more value to the beneficiaries of the estate than having those expenses reflected on the estates income tax return (Form 1041). By being reflected on the return, these expenses and losses can (1) be used to shelter any income earned by the estate during the time that the estate is open, and (2) potentially flow to the beneficiaries upon the filing of a final estate income tax return, Form 1041, in the final year for filing the return.

You cannot claim the estate administration and other expenses of loses on both returns – if a deduction is claimed for income tax purposes on the 1041, the Executor must file a statement that no estate tax deduction for those items has been allowed and waive any right to take an estate tax deduction for them.

When the estate is concluded, the estate may file a final income tax return marked as “final.”

The instructions to the Schedule K-1 for Form 1041 identify how a beneficiary filing a Form 1040 should report their share of income and deductions. Section 11 reflects final year deductions proportionate to each beneficiary and how it these deductions can be reflected on the beneficiary’s personal 1040. The 1041 instructions specifically provide “if the estate or trust has for its final year deductions (excluding the charitable deduction and exemption) in excess of its gross income, the excess is allowed as an itemized deduction to the beneficiary succeeding to the property of the estate or trust.”

Note that these deductions will be subject to any limitations and be applied to the beneficiary because of his or her taxpayer profile. Even where an estate has no income, a 1041 should be properly filed each year in order to record the deductions and/or losses of the estate, which may, in the estate’s final year be passed along, on a pro rated manner to the beneficiaries estate for utilization in their personal tax returns. 

Taxed Enough? Looking at Leaving NJ? Domicile and Residency are Key Questions

It seems that my in box is full of information on better places to live than New Jersey from a cost perspective (personally, I love the shore and NYC and Philly and skiing all being within 2 hours drive). I got a very thoughtful piece from my friends at RegentAtlantic Capital entitled "When You've Paid New Jersey Enough".  In the article, Bill T. Knox, "reviews the key factors that should determine whether someone who has lived in NJ and then establishes a home outside the state will be successful in escaping the state’s income and death taxes."  

Bill looks at New Jersey domicile and residency from the income tax and estate and inheritance tax perspective.  Domicile is a very tricky question - it is where you intend to be without intending to move.  So if you intend to be an Florida resident, but keep your New Jersey home and all your bills coming here, did you really leave New Jersey domicile?  

And why does domicile matter?  Well, New Jersey income tax applies to all income earned by New Jersey "residents", and the New Jersey Estate tax is levied against a New Jersey resident who dies.  Clearly, if there is a question, New Jersey would like to claim that you live here and you should pay here.  So, if your domicile and residency are supposed to be elsewhere, you need to make sure that you have dotted all "i's" and crossed all "t's" to make that happen.

Quick story - A client of mine died January 1, 2009.  She had changed her residency and domicile to North Carolina in the year before her death.  Her estate is approximately $3.5 million.  Had she dies a New Jersey resident she would have owed New Jersey approximately $230,000.  As a North Carolina resident, her estate tax bill is $0.00.  How is that for some effective Estate Planning???

In "When You've Paid New Jersey Enough" Bill provides a quick checklist of key domicile and residence issues.

Moving From Florida?? A Reverse Trend that May Prove Expensive for Residents

 It is no secret that New Jersey is the most expensive state to die in. New Jersey has the lowest estate tax exemption threshold of the country at a mere $675,000. In contrast, Florida has no state-level estate tax, and the creation of an estate tax is specifically banned by its Constitution. in addition, Florida's state revenues are generated primarily from property tax and sales tax. Due to all of these things, Florida is a less expensive State to live and die in New Jersey.  For years we've been recommending to clients who have homes in both New Jersey and Florida to consider changing their residency of Florida.

Bloomberg.com in Florida’s First Population Decline Since 1946 Squeezes Budget reports that Florida just experienced it's first population decline since 1946 -- that's over 50 years of growth -- and the last decline was apparently as a result of military personnel leaving Florida after World War II.  And the predictions are that this trend will continue:

 "Rising property taxes, increased homeowner insurance costs since the 2004-2005 hurricane season and competition for retirees from other states such as Georgia will damp population growth in coming years".

Additionally, "Sales-tax collections, which brought in 27 percent of revenue in 2008-2009 in a state without a personal-income tax, fell 10 percent last year."

From an estate planning perspective then, this raises the question of whether or not Florida will continue to be the "go to" state when recommending residency change from New Jersey as a way to reduce estate taxes.  Florida may need to change its revenue generation model, by raising sales tax, raising property tax, adding income tax, bringing back the intangibles tax, or some other manner that makes it more expensive to be a Florida resident.