Money Matters: Financial experts explain long growth of modest homes

Posted: Tuesday, March 22, 2011

Some time ago, Dan lunched with a friend who related how he had been mesmerized by the gripping movie, “Superman,” and how much he loved that series as a kid—and, in fact, he still does. He explained, “Times have changed. As a kid I wanted to fly like Superman. As a teenager, I wanted his X-ray vision. But as an adult, all I now want is his Fortress of Solitude.”

Our needs change over time, and although nobody likes change - except wet babies - we ignore change at our peril. For example, tax and inheritance laws are constantly changing. This month’s question is from a couple that is smart enough to perceive the need for change and look for guidance in adapting appropriately.

I’m 83, and my wife is 78. We are both in good health. We have three children and want to treat them all alike in our wills.

We have two investment accounts, totaling about $600,000, divided into 75% blue chip stocks and 25% bonds, with financial advice supplied by (hopefully) a smart advisor. 

We each have Social Security income, and I make some money from renting part of our farm, where my wife and I have lived for more than 40 years. And to our surprise, the farm is now worth over $1.5 million, with no mortgage balance. That’s even after the recent fall in real estate prices.

We have considered selling our farm now, so we can invest the net proceeds, after capital gains, in secure bonds, municipals and Treasury notes. We want to use the interest for living expenses as we age. When we are both gone, all of our money would then be divided equally among our three children.

What is the best way to pass our assets to our children?

You are in the same situation as many people who have seen once-modest farms, homes and stocks rise to very high prices due to long term growth and inflation in spite of the recent downturn. A bestselling book titled, “The Millionaire Next Door,” by Thomas J. Stanley, details your situation, which we’ll paraphrase as “modest living with extraordinary wealth.” With this wealth may come extra taxes for your kids, especially if you fail to make sound decisions while you and your wife are living and in good health.

You should not sell your farm now in order to later divide your wealth evenly among your children. If you sell the farm now, you’ll owe tax on any gains over $500,000 ($250,000 for single taxpayers). State and local taxes may apply as well. 

Instead, you should hold your farm until you and your wife pass away, and then it will pass income tax-free to your children. When you and your wife die, your children will receive the farm at a stepped-up cost basis, which means, if the kids sell it then, there will be no capital gains tax due.

Notice that we said “income” tax, and not “estate” tax-free. In 2011 and 2012, each decedent has a $5 million exemption that allows him or her to pass that much money to his or her heir’s estate tax-free. If you have more than that, estate taxes apply and they can be expensive: the maximum rate is 35%. But if you establish a revocable living trust now, you can preserve $5 million for yourself and $5 million for your spouse, effectively raising your exemption to $10 million as indexed.

You need professional guidance. Trusts are tricky, so find a good financial planner who can direct you to a good estate attorney and get your planning done sooner rather than later. Your kids will benefit for generations. Until next time, Your Money Matters, so treat it wisely.

 Dan Searles and John Stohlman, of Medallion Financial Group, are CFP®’s and Registered Representatives with over 25 years of experience in the financial industry. Securities and advisory services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Adviser. 

 Medallion Financial Group and NPC are separate and unrelated companies.  They manage over $250 million of client assets. For further info, questions or comments regarding this article, Dan and John can be reached at 1-800-878-9704 or Dan.Searles@natplan.com. Representatives are not attorneys, do not draft estate planning documents, and may only serve to coordinate an overall estate plan. Estate planning can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning attorney or other professional before implementing any strategy.

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