Advice for New Client

[Chief]

I have a new client who wants some advice on her 401K and her father's residence. I have few details but will learn more when I return to Florida from Michigan around November. I would guess the clients is in her late 40's or early 50's. Her father is quite old and they are wanting to make the transfer of the old home place as painless as possible.

Now I dont know what she wants to know about her 401K. It seems that there is little she can do except put the maximum contribution in. I doubt that she needs to take any of this money in early distributions for now.

She was talking about her Dad transferring the ownership of his property to her now to avoid probate. She promised that she would do nothing until I returned and could meet with her. I told her it would probably be best to wait and transfer that property at his death. Capital gains would be less. With these sketch details your advice would be appreciated.

[Armando Beaujolais]

I have no answers to that, but the vague reference to 401k and house rang a bell, and also Florida.

I have a client who spent some time in Florida and came back wanting me to help her use her 401k money to buy her house. I quickly grabbed my 10-foot-pole and poked it around going "BACK! BACK!" She'd heard something on the radio about "rolling" retirement accounts into a residence.

I heard something similar from another client. This one also had notion put into his head by a guy on the radio, this time I believe it was driving through Texas, or waltzing, whatever.

I didn't get enough details to have any idea what the radio guy had to say about it. All I told them was that I wouldn't be involved in any way. But there's at least one person out there on the radio who's making people think they can roll their retirment funds into a main or second home.

I also had a client who quit his job to go into business for himself. He'd been convinced by an elevator captain or something that he could quit his job, form a corporation, and roll his retirement funds tax free into the new corporation and use his 401k to fund his highly unlikely-to-succeed new venture.

Like I said, I have no idea what your client's situation is. Vague references to 401k's and homes rang a bell.

[dyne]

sale of parent's residence

I read some time ago that a law is in the works to make it a criminal offense to transfer
a residence from a parent to a child in order to qualify the parent for medicaid. I am not sure
if this applies to attempts to avoid probabe also.
Secondly such a transfer will cause more tax to be paid. If the father has a place to live,
in a nursing home or in the child's home; the best course of action is for the parent to
sell the residence. If the gain is less than $250,000 and if the parent lived there 2 out of
the past 5 years, including periods not in the home due to illness, there would be no
tax on the gain. Or wait until the death of the parent and the property inherited would
have a basis to the heir of the fair market value at date of death. This would result in
a small gain and small tax owed by the heir in most cases. I constantly encounter
people who transfer the parents home without asking me first and then are upset when
they owe a large tax because their basis in the residence is then the parents basis,
which is usually very small, resulting in a large taxable gain.

[Bees Knees]

He'd been convinced by an elevator captain or something that he could quit his job, form a corporation, and roll his retirement funds tax free into the new corporation and use his 401k to fund his highly unlikely-to-succeed new venture.

Elevator captain??? You mean there’s a crew? There’s a Gilligan out there operating elevators when the captain needs a break?

I read some time ago that a law is in the works to make it a criminal offense to transfer
a residence from a parent to a child in order to qualify the parent for medicaid.

There was talk but nothing ever came of that law.

Transferring a house into the kid’s name is a common planning tool that is done all the time. The two advantages are that you avoid losing the house if the transfer is more than three years from the time Dad goes into a nursing home. You also avoid probate. The drawback is you do not get a step up of basis when Dad dies.

An alternative is to have the Kid put on as joint tenant with right of survivorship. That too will avoid probate at death, but will not prevent the nursing home from taking the house.

If no money was transferred from the Kid to the Dad for the joint interest, then at death, joint tenancy converts to inheritance and the Kid gets step up of basis.

[Armando Beaujolais]

Of course elevator captain. Those of us more refined are schooled in the finer points of elevator etiquette which requires, when entering a crowded elevator, to assign an individual to the postion of "Elevator Captain."

I can't tell you how many times this seemingly minor organizational effort has prevented chaos from breaking out.

[BOB W]

Has everyone forgotten.....

.... about Life Estates???????????

[BOB W]

I just rec'd this email from CPA Classified

PROFESSIONAL CLASSIFIEDS
**Weekly Circulation Exceeds Over 180,000 Accounting Professionals
**For the Week Ending September 10, 2005
-------------------------------------------------------------------

INVEST YOUR "IRA" IN REAL ESTATE
Were you aware that your clients can invest their IRA in real estate? National Real Estate Syndication Programs suitable for IRA and 401K Portfolios are now offered. Investors receive 8-9.5% annual fixed rate of return with profit participation up to 50%. Click here to learn more about this exciting program: http://www.cpadirect.net/cpadirectmarketing/resynd.cfm

[WhiteOleander]

PROFESSIONAL CLASSIFIEDS
**Weekly Circulation Exceeds Over 180,000 Accounting Professionals
**For the Week Ending September 10, 2005
-------------------------------------------------------------------

INVEST YOUR "IRA" IN REAL ESTATE
Were you aware that your clients can invest their IRA in real estate? National Real Estate Syndication Programs suitable for IRA and 401K Portfolios are now offered. Investors receive 8-9.5% annual fixed rate of return with profit participation up to 50%. Click here to learn more about this exciting program: http://www.cpadirect.net/cpadirectmarketing/resynd.cfm

Yes, but I believe it is a prohibited transactioon for your IRA to own your personal residence. Not sure about 401Ks.

[Mark Goldberg]

Bees Knees

About the joint tenancy with survivor rights. In Massachusetts when you add a person to the deed as joint tenants it is deemed 50-50 ownership unless you specify otherwise. So your idea of doing this and then getting a step up would not work so well here unless you were smart enough to add ownership % to the deed so the child maybe gets a .005% of ownership effecting an almost 100% step up.

[Lion]

Real Estate as a retirement investment

I too have been hearing people push the idea of retirement plans owning real estate. Also, don't think either an IRA nor a 401(k) can own the investor's personal residence; but not at work to look that up. The starting place for your client is to read and understand the plan document for his own 401(k). Glad he talked to you before doing anything. Wish I could get all my clients to do that. Let us know what he really wants to do when you get together with him.

[Bees Knees]

Right of survivorship means the survivor inherits the entire interest upon the first owner’s death. State law may treat it as a 50/50 deal while they are both alive, but the survivor is 100% owner after the other dies.

For Federal estate tax purposes, step up of basis is determined by what goes on the estate tax return. IRC Section 2040 says the entire interest in joint property has to go on the estate return of the first to die. State law is irrelevant. Federal law is telling you to do this. The exception to this rule is if the survivor paid adequate and full consideration in money or money’s worth. The only way around this rule is to actually give up your right of survivorship in the property, such as a tenancy in common situation where each owner independently owns and interest but does not have survivorship rights.

In other words, even if Massachusetts says its 50/50 while they are both alive, if the survivor becomes a 100% owner and did not pay FMV for his joint interest before death, then he gets full step up of basis because the decedent is required under Federal law to include the entire interest on the estate tax return.