Balliett Financial Services, Inc.
Q: My mother, widowed, died in December 1993. I was the only heir. She left me her ranch and swank six-bedroom house with a spacious butler's pantry, oversized kitchen, lap pool, tennis court, nine-hole putting green, landing strip, and a spiffy two-bedroom guest house. All told, the property was appraised soon after her death at $3,900,000. My wife and I and our two children moved in three months later, and it's still home. However:
Last week, a developer made a firm offer that's double the 2008 appraisal, which was completed just a month ago. Our kids are in graduate school now and won't be moving back, so we're tempted to sell and move into town. Trouble is, the very thought of the capital-gains tax we'd have to pay makes us choke. Is there a way to make it go away?
A: More than one. Here are three major examples and some others under federal law in mid-2008:
1. Keep the property for the rest of your life and bequeath it to your spouse in a credit-shelter trust. Its beneficiaries might be your children and any grandchildren. That way, under present law, you, your wife, and the children would pay zero capital-gains tax linked to your ownership or your wife's. If the children were to sell, they'd share a capital-gains tax only for appreciation in resale value dating from the day the property became theirs.
2. Alternatively, you and your wife agree that whichever of you becomes the surviving spouse will leave the property to a charitable foundation. Again, no capital-gains tax, not even if it's to be a family charitable foundation or a supporting organization.
3. Or, gift it off to the two children now, or whenever. You wouldn't pay the capital-gains tax, but they would -while netting an attractive after-tax gain without getting sweaty.
Other possibilities might involve a discussion of an IRC Sec. 1031 exchange (of your country property for city property), a family limited partnership, an installment sale, a charitable lead trust, and/or a charitable remainder trust. All of alternatives mentioned in that sentence and above it are conservative when done appropriately, and they can be mixed and matched.
Yes, there are a couple of aggressive alternatives, too, but we have never recommended them. Our basic tax advice is not to mess with the feds.
Q: I am a surgeon soon to complete a residency focused on heart procedures. I have been offered a seven-figure compensation package by a prestigious heart group. My wife is a practicing cardiologist. What's your basic tax advice for us?
A: Chances are, your compensation package and hers each includes a tax-qualified retirement plan with a yearly $46,000 tax-deductible contribution by the employer. To you two, that's $92,000 in tax-free, tax-deferred investments. His and her IRAs would push the total investment to $102,000 yearly or about $8,500 monthly.
At $8,500 monthly (often the better choice) over 20-year careers, the two of you might share tax-favored, asset-protected wealth ranging from $5,000,000 at 8% or $8,400,000 at 12%. Over 25-year careers, our estimated projections are $8,000,000 at 8% and $15,970,000 at 12%.
Our projected figures are rounded down, and they ignore gains from increased contribution limits adjusted by the IRS from time to time as an inflation hedge.
Q: Got any more tax-planning suggestions? A:Of special interest, several. When we know more about you and your situation, we can talk about them, if you wish.
More on this subject is in the clients' section at BalliettFS.com.
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