Guest Post – Capital Gains Inequities Among Seniors

Posted in Planning, Tax planning at 3:59 pm

(This guest post was written by James Hall, CLU, with assistance from John Upton and Dunham Sherer, Esq.)

Are State (Prop 13) and Federal Estate Tax Laws limiting home inventories for sale, resulting in a permanent commitment to higher prices and unfair capital gains treatment between surviving spouses and senior couples selling their homes? The solution may be federal legislation to eliminate capital gains for seniors by eliminating the current 250,000 per person exemption Capital Gains Tax.

The positive side effects of allowing seniors (age 65) to sell their homes and personally owned commercial property capital gains tax-free are as follows:

  1. It is fair to all seniors age 65 and older by giving all equal financial options.
  2. It should increase the inventory of real estate, making the market more competitive.
  3. It will increase local tax revenues, because under Proposition 13, the property tax base increases by only 2% per year, unless real property is sold, at which point it increases to current market value. Seniors selling tax free will bring in a current market price taxpayer, and raise the property taxation base to current market value.
  4. It frees up dead equity capital and moves some of it into the free market.
  5. Help relieve the Proposition 13 constraint upon real estate sales, and as a result develop more property tax revenue without changing the Proposition 13 legislation.
  6. Schools should be the #1 beneficiary of increased property tax revenue.

Why do some seniors pay huge capital gains when selling their homes while others pay nothing? The reason is a little known part of the 1981 Federal Estate tax legislation referred to as the “Step-Up-In-Basis-At-First-Death.” This provision means that a current surviving spouse can sell their home for any price with no tax obligation at all. Contrast that to a senior couple across the street that will have to pay a 24% capital gains tax on all gain above the $250,000 per person exemption. In many neighborhoods, that can now amount to a tax of $300,000 and much more on the couple, while the current surviving spouse can make the same sale and move on with no tax obligation at all.

A further point is that this step up provision doesn’t only apply to homes. It applies to both halves of the entire estate. This includes commercial property, cash, stocks, bonds – everything. This is clearly special interest legislation for the very rich to eliminate Capital Gains.

The vast majority of Californians owning homes don’t think Estate Tax legislation applies to them. They are wrong. It applies to millions of homeowners in California and in other parts of the country, who may need to sell and realize gains in excess of the $250,000 per person exemption. They aren’t rich and many can’t afford a huge tax at sale. There are an increasing number of neighborhoods where properties have appreciated more than the current $250,000 per person exemption, yet the tax only impacts the couple who must sell, not the current surviving spouse at any age.

A partial equity solution to property tax inequality would be to give equal treatment to senior couples and surviving spouses, at least with respect to real estate sales. The long-term effect of the existing Federal Estate tax legislation is to create an increasing financial incentive for seniors to stay where they are and hold property until a death occurs. It leads to limited inventories, lower potential property tax revenues in older neighborhoods and ultimately higher prices for residential and commercial real estate.

The current legislation has increasingly become special interest legislation that transfers the property and capital gains taxes to middle class homeowners and senior couples who must sell. The effects of this legislation have been over 20 years in the making. The inequities created are obvious. What will the next 20 years bring, with continuing inflation and no change in the current laws, other than increasing inequities among surviving spouses and senior couples?

Is it any wonder why California real estate values continue to rise with special interest legislation that penalizes home and commercial real estate sales by senior couples? Its unfair that some seniors get a capital gains break on the sale of their property and others do not. Eliminate the capital gains tax on property and many seniors will sell at a convenient time, which will increase housing supply and lower prices. The time for legislation to correct these effects on the real estate market is long past due.

James U. Hall, CLU, Monte Sereno


Followup: The $14 Estate Plan

Posted in Living trusts, Planning at 4:30 pm

I guess my Amazon review – reproduced substantially as this morning’s post – struck a nerve, as today I received a four page letter from Janet Dobrovolny, the attorney who created Suze Orman’s Will & Trust Kit. The letter disagrees with several of my conclusions, and requests “a full detailed response” which I have offered to provide, if Ms. Dobrovolny agrees that I may republish her letter along with my response.

How much estate planning do you get for $14?

Posted in Living trusts, Planning, Tax planning, Wills at 8:32 am

Last month, I wrote briefly about Suze Orman’s Will & Trust Kit. After writing that post, I decided perhaps I was unfair by commenting about the program without using it myself, so I ponied up $14 to get a first-hand opinion.

As I mentioned before, the trust(s) created by the program use California law, no matter what state you live in. A joint trust created with this program says that all property transferred to the trust will be community property. A joint trust created by this program also waives each spouse’s rights under California Family Code section 2640. Don’t know what community property is, or what section 2640 says? Too bad.

Briefly, Family Code section 2640 says that spouses have the right to be repaid for separate property they bring to the marriage, or contribute to community property during the marriage – e.g., if you own a house as a single person, then get married, and later get divorced, you don’t need to split the equity you already had in the home at the time you were married.

I think it’s amazing that the program expects people to waive their rights under 2640 without explaining what that means – that’s potentially a decision with consequences in the tens or hundreds of thousands of dollars, in the event of divorce.

Also, many people want to put separate property into a joint trust for ease of management – a well-drafted trust will preserve the separate property character of separate property assets which are titled in the name of the trust. The Suze Orman trust does the opposite.

Before printing any documents, the program makes you agree to a disclaimer that says you should consult an attorney. Unfortunately, if you’re not in CA, it may be difficult to find an attorney who wants to give you a legal opinion about CA law.

The trust included does absolutely no estate tax planning. It’s good that the authors are up-front about this, but it would be helpful if the materials on the outside of the box explained that if you’ve got more than $1 million in property, the authors think you should avoid using their program and see an attorney instead.

Ultimately, to generate an estate plan using this software, you’re going to have to click over and over again to “AGREE” to a disclaimer that tells you these documents should be reviewed by an attorney before they’re actually used; that the authors are not providing legal advice; that the authors accept no responsibility for your actions. Would you hire an attorney who gave you documents while asking you to sign a document agreeing not to sue them if the document turned out to be useless, or worse?

The trust created by the program can be modified entirely after the death of the first spouse – so there is no protection in place to preserve assets for the joint children if the surviving spouse remarries or needs Medicaid-funded nursing home care.

The documents provided to change beneficiaries for IRA and 401(k) plans have no discussion of – and make no provision for – planning for “stretch” IRA distributions, and in fact make “stretch” planning impossible, which might potentially mean losing out on tens or hundreds of thousands of dollars due to the missed stretch opportunity.

Even though the attorney who co-wrote the software is licensed in California – and California is the forum state mentioned in the choice of law clause – the estate plan makes no provisions for California property tax planning for beneficiaries who may inherit real property. If you’ve lived in California, you’ll appreciate the importance of preserving your Proposition 13 property tax assessed value for your children, and their children .. if your estate plan was drafted with that end in mind. There may be similar issues for people who live in other states – I’ve got no idea if there are or not, and you probably don’t either, unless you find someone who knows your local law.

The program doesn’t cost much money and has some educational value. So it’s not a total waste. The plan and the documents it produces are a long way away from what a good estate planning attorney can produce – but what’s really missing here is an overall understanding of the family’s assets, values, risks, and opportunities .. together with a comprehensive plan to address those circumstances.

I’m an estate planning attorney in CA – but I don’t really think of a software package that costs less than a large pizza as a meaningful competitor, especially after trying it out to see what it produces. I wouldn’t mind at all if potential clients of mine used the software to play around at home to get comfortable with some of the terminology and issues that are part of putting together a real estate plan – but there’s no way I’d recommend this to someone I cared about as a good way to create an estate plan that they actually planned to sign and use.

I’m still shocked by the decision to make trusts for all states subject to California law – that’s the kind of advice that can only be given responsibly by someone who understands California law, the law of your state, and your personal circumstances. There are cases where I might choose to have a client’s trust be governed by the law of another state – but those cases are relatively rare, and I can articulate clear, concrete reasons to do so. A blanket choice that everyone, everywhere, should use California law strikes me as inappropriate.


Another estate planning option for California pet owners.

Posted in Planning at 9:05 am

The UC Davis School of Veterinary Medicine has announced a new program called “TLC for Pets“. The program provides a structured way to provide a loving home and continuing veterinary care for pets after the death of the pet’s owner.

Some pet owners choose to put together a comprehensive care plan for their pets in the event that the pets outlive their owners. Those plans typically include directions about the feeding, medical care, and other needs of the pet .. along with funds necessary to provide for the pet’s support and to compensate human caregivers.

Other pet owners have close family or friends with pet-friendly homes and can provide a long-term home for the pet if the need arises.

However, some pet owners find themselves in a situation where they do not have the resources to fully fund their own pet mainentance trust, and they do not have family or friends who are able to welcome the pets into their homes. In this relatively common circumstance, programs such as TLC for Pets or the San Francisco SPCA’s SIDO Program provide a valuable public service.