Topics included in this issue:
Obviously, your estate plan should be updated if there has been a change affecting the individuals who are named or should be named in your planning documents. A marriage, divorce and death are all times for review. Occasionally, the birth of a child is a time for review, although typically estate plan documents contemplate additional children and, if so, a birth alone would not be a reason for review. However, if your plan makes gifts to specifically named individuals (for example, grandchildren) and a new grandchild arrives, then you may want to include that grandchild in your plan. Regardless of whether the change involves your beneficiaries or those named in positions of responsibility, such as guardians, personal representatives or trustees, it is important to act after the change.
Assets
If you have a substantial increase or decrease in your net worth, your estate plan should be reviewed to be sure that it appropriately addresses your current circumstances. An update is in order if you have made a specific gift of an asset and then you dispose of that asset. Your documents should be adjusted to accommodate your current situation.
Law Change
If there is a change in law, you should contact your attorney to determine if the change affects your plan. We use the articles in Estate Planning Focus to highlight major changes in law, but you are most knowledgeable about your own situation. The change could occur in tax or other laws, and if you think a change affects your plan, please ask your attorney.
Age 70 1/2
If you have an IRA (other than a Roth IRA), 401(k) or other qualified plan, you must begin distributions from those plans after you attain age 70 1/2. On April 1 of the year following the date you reach age 70 1/2, the beneficiary that you have designated for your plan accounts will have an irrevocable impact on both your and your beneficiary's required distributions from the plans. The distribution rules are complex. Thus, it is of critical importance to review your beneficiary designations and other estate planning documents prior to April 1 of the year you reach age 70 1/2.
Time
The passage of time itself is a reason for an update. We suggest a checkup every three to five years if another reason has not prompted a review before then.
When the time for review arrives, normally we will ask you to complete a new questionnaire that gives us a current look at your assets and family situation. Estate planning is a lifelong process and you should not assume that once done, your will and trust and other documents will be appropriate forever.
If a single taxpayer (or married couple) has Adjusted Gross Income (.AGI.) of less than $100,000, an individual may elect to convert a regular IRA to a Roth. The taxable value of the regular IRA will be taxed currently (but there is no 10 percent penalty if you are under age 59 1/2). If you convert during 1998, you may report the taxable amount evenly over the next 4 years. A conversion after 1998 requires payment of all tax for the year of conversion.
The Roth differs from a regular IRA in the following significant ways:
What if your AGI will be below $100,000 but you don.t have an IRA? Many individuals are participants in qualified profit-sharing plans maintained by their employer. Those plans could be revised to allow a distribution to an individual even if actively employed. The employee could .roll over. to a regular IRA, and then convert to a Roth. The profit-sharing benefit would be reported as income over the next four years (without a 10 % penalty). This will allow the benefit to be taxed now, at its current value, and avoid all future income tax as the benefit grows. The individual would continue to participate in the company.s profit-sharing plan as well.
Conversion to a Roth is ideal if you expect your income tax bracket to be the same or higher when you need the money. The savings are greatest if the conversion taxes are paid from other assets.
In most cases, a conversion of a regular IRA to a Roth, or a distribution from a profit-sharing plan, followed by a rollover to an IRA and conversion to a Roth, will reap substantial income tax savings in the future. If we can be of assistance in planning your conversion, please call one of our Employee Benefits attorneys.
Homestead Exemption. Michigan taxpayers get a substantial real estate tax break on their primary residence. Losing the homestead exemption could cost you thousands of dollars a year. Transferring your residence to your trust will not affect the residence's homestead status as long as you or your spouse are the primary beneficiaries of your trust.
Title Insurance. Properly deeding your residence to your trust should not affect your title insurance. We generally recommend transferring the property via a warranty deed and not via a quit claim deed.
Mortgage. If your property is subject to a mortgage, you need to make sure that a transfer will not put you in default on your mortgage. So long as you or your spouse is beneficiary of your trust, transfer of property subject to a mortgage should not trigger acceleration under a .due on sale. provision, and the mortgage should remain in effect as it was before the transfer. You should check with your lender or review the mortgage to be safe.
Casualty Insurance. You should inform your home owner's insurance carrier of the transfer. The insurance company should show the trust as an additional insured on the policies.
Creditors. Finally, if you have significant debts, own assets which have the potential for claims, or participate in a profession where claims may be made against you, you may be giving up creditor protection if you transfer your home. This is because creditors cannot seize real estate which is jointly owned with your spouse. Therefore, transferring the residence to your trust likely places it at greater risk to creditor.s claims.
Documentation. To transfer the residence you will need to file a deed with the Register of Deeds, file a homestead update with the city or township if it is your primary residence, file a property tax affidavit with the city or township assessor and you may have to file a land division affidavit with the city or township.
If it suits your circumstances, due to the complexity of the issues involved, a professional should assist you in preparing all documents transferring your residence to your living trust.
What is Probate? Probate is the post-death legal process by which your assets are administered and eventually retitled in your designated beneficiary's name. Michigan's probate process includes modern, streamlined alternatives, but all probate involves some delay of distribution of assets, cost and public notice. Only property in your own name at death is probated. Assets in joint name with rights of survivorship and contractual assets payable to a named beneficiary (such as life insurance) avoid probate. One form of Michigan probate proceeding, known as .independent. probate, is an informal probate process that seldom requires direct court involvement and, if death taxes are not involved, can be completed in as little as six months, with partial distributions of assets made prior to that time.
Isn't Probate Open to the Public? Wills and all probate proceedings are matters of public record and can be reviewed by the general public upon request. In addition, in a supervised probate proceeding, a detailed inventory of your estate is made part of the public record. Michigan independent probate, however, permits maintaining confidentiality as to the inventory. Funding your trust may maintain confidentiality with respect to the size and contents of your estate because a trust is a private document.
Can I Avoid Probate? Assets in a living trust avoid probate because you don.t own them anymore; the trust does. Transferring assets to or .funding. the trust during lifetime avoids probate of those assets.
How Do I Transfer Assets? You must transfer title to assets in your own name to your trust. Everyone's assets will differ, and the transfer effort involved will depend on the types of assets you own. Brokerage accounts are transferred by completing new account forms. Banks will require a change of account name as well. Transfers of real estate require detailed real estate documents and possible notification to lenders and insurance companies. (See related article.) Motor vehicles and boats are best left in your individual names because a sales tax may be imposed on their value if title is changed to the trust.
Who Manages the Property? The trustee of a trust maintains control of the trust assets. Most people serve as their own trustees of the trusts they create and therefore have complete control over the assets in their trusts. Upon your incapacity, the successor trustee takes over and manages the assets for you during your lifetime. This arrangement avoids the necessity to go to probate court and having a conservator appointed for you. At your death, the successor trustee manages the assets for the beneficiaries of the trust until the time of distribution.
Are Assets in a Trust Protected from Creditors or the IRS? There are no significant income tax advantages or disadvantages to funding your trust during lifetime. A living trust is taxable to you during your lifetime and all items of income, deduction and credit are reported on your individual tax return. There is no death tax advantage to funding your trust during your lifetime. All assets in your trust are taxable in your estate for death tax purposes. Placing assets in your trust generally will not protect the assets from your creditors. At the most, it may make it more difficult for a creditor to discover the assets. If you are indebted to a large degree, own assets that have the potential for litigated claims or are involved in a profession where claims may be asserted against you or your estate, you may be better served by leaving some assets in your individual name to be probated under court supervision. This is because under current law, probate has a set claims period for creditors, but trusts do not.
Does a Trust Avoid Challenges? Generally, the same rules apply to funded living trusts and wills in a contest by family members. Funding your trust during your lifetime will not prohibit a challenge from family members, but may make a challenge by beneficiaries more difficult, particularly if your estate passes to collateral relatives, charities or other individuals who are not immediate members of your family. Waiting until death to fund the trust means your heirs will be given notice of your will and for some it is important to avoid this notice.
In summary, funding your trust during lifetime avoids probate and its cost and avoids public notice. That advantage must be weighed against the expense and effort that must be undertaken to transfer the assets to your trust. Fully avoiding probate, especially given Michigan's streamlined probate procedures, is not for everyone, but should be a consideration during your planning.
Q. What is new about this Code?
A. It revises the law governing wills, intestate estates (distribution when there is no will), probate administration and trust administration. It essentially adopts Uniform Probate Code which about 20 other states have enacted, but with some significant Michigan variations.
Q. Do I need to change my will to respond to the new law?
A. No. First, the Code is not effective until April 1, 2000. But your will and trust will probably work just fine under the new Code. The changes primarily affect the manner in which estates are administered, but it is always a good idea to review your will and trust periodically.
Q. How did you get involved in drafting this legislation?
A. This began as a project which I chaired in October of 1988 to determine whether modification of the probate code or preparation of an entire new code was the best avenue. When preparation of a new code was the chosen route, I became reporter (principal draftsman) for the drafting project.
Q. How did the process evolve from evaluation to law?
A. It involved assigning drafting projects on specific issues to various attorneys involved in Michigan.s Estate Planning and Probate Council. I then edited their initial drafts. I and others on the drafting committee then made presentations to the entire Council. The Council made comments and we revised and edited the proposals. We continued to review and revise the drafts with the Council until we had a final draft which we could present to the Legislature.
Q. How did you get the bill introduced and passed by the Legislature?
A. The Code was sponsored by Senator William Van Regenmorter. I and others worked with the Legislative Service Bureau where the text of the proposal was put into bill form. We also coordinated efforts with the Section's lobbyist and gave testimony at approximately 10 hearings of the House Judiciary Committee and its subcommittee responsible for reviewing the entire bill. The committee finally approved the bill, and Michigan.s House Senate passed it in September of this year.
* John is a partner in our Muskegon office and was the principal draftsman of Michigan.s recently adopted Estates and Protected Individuals Code. He concentrates in estate planning, probate, federal income, and estate and gifts taxation law, with expertise in planned charitable giving. John is a Fellow in the American College of Trusts and Estates counsel and is listed in The Best Lawyers in America. He is a former Professor of Law in Estate Planning and Gift and Estate Taxation at the University of North Carolina School of Law. John is also licensed to practice in Florida and North Carolina. (University of Michigan, J.D., 1966.) When John is not working with clients and drafting legislation, he enjoys working on projects at his home in Spring Lake.
Earlier this year we told you about a new business exclusion from estate tax for family owned business. That has now been changed to an estate tax deduction and is limited to $675,000. A number of tests must be met at the time of death in order to take advantage of the deduction. Consult with a member of the Trusts and Estates Group to learn more.
IRS Reform
As part of the 1998 Tax Act, a number of changes are coming to the IRS. Perhaps the most important is a change in the burden of proof from the tax payer to the IRS with respect to a factual issue to determine tax liability. The taxpayer must present credible evidence with respect to that issue and satisfy three conditions: proper record keeping, cooperation with the IRS, and, in the case of taxpayers other than individuals, net worth is less than $7,000,000. Other taxpayer rights are also part of new legislation.
Capital Gains
As this newsletter goes to press, the stock market is down by almost a thousand points from its high in July. If you made a conversion of an IRA to a Roth IRA when the stock market was at its peak, you may reduce the tax liability by undoing that conversion and reconverting today at a time when your portfolio is less.
WHEN SHOULD MY PLANNING BE UPDATED?
SHOULD YOU CONVERT YOUR REGULAR IRA TO A ROTH IRA?
THINGS TO CONSIDER BEFORE TRANSFERRING YOUR HOME TO YOUR TRUST
FUNDING LIVING TRUSTS: MORE (AND LESS) THAN AVOIDING PROBATE
THE ESTATES AND PROTECTED INDIVIDUALS CODE--AN INTERVIEW WITH JOHN MARTIN
TAX UPDATE
WHEN SHOULD MY PLANNING BE UPDATED?
You complete your estate plan and have the sense of satisfaction of knowing that you have properly provided for your family and assets in your will, trust and other planning documents. The next logical question that arises is .When should I review and update my estate plan?. The answer is quite simple. A review is in order whenever you have a change in the people named in the plan, a substantial change in your assets, a change in law that affects your plan or the passage of enough time that it is likely that updates are required.
PeopleObviously, your estate plan should be updated if there has been a change affecting the individuals who are named or should be named in your planning documents. A marriage, divorce and death are all times for review. Occasionally, the birth of a child is a time for review, although typically estate plan documents contemplate additional children and, if so, a birth alone would not be a reason for review. However, if your plan makes gifts to specifically named individuals (for example, grandchildren) and a new grandchild arrives, then you may want to include that grandchild in your plan. Regardless of whether the change involves your beneficiaries or those named in positions of responsibility, such as guardians, personal representatives or trustees, it is important to act after the change.
Assets
If you have a substantial increase or decrease in your net worth, your estate plan should be reviewed to be sure that it appropriately addresses your current circumstances. An update is in order if you have made a specific gift of an asset and then you dispose of that asset. Your documents should be adjusted to accommodate your current situation.
Law Change
If there is a change in law, you should contact your attorney to determine if the change affects your plan. We use the articles in Estate Planning Focus to highlight major changes in law, but you are most knowledgeable about your own situation. The change could occur in tax or other laws, and if you think a change affects your plan, please ask your attorney.
Age 70 1/2
If you have an IRA (other than a Roth IRA), 401(k) or other qualified plan, you must begin distributions from those plans after you attain age 70 1/2. On April 1 of the year following the date you reach age 70 1/2, the beneficiary that you have designated for your plan accounts will have an irrevocable impact on both your and your beneficiary's required distributions from the plans. The distribution rules are complex. Thus, it is of critical importance to review your beneficiary designations and other estate planning documents prior to April 1 of the year you reach age 70 1/2.
Time
The passage of time itself is a reason for an update. We suggest a checkup every three to five years if another reason has not prompted a review before then.
When the time for review arrives, normally we will ask you to complete a new questionnaire that gives us a current look at your assets and family situation. Estate planning is a lifelong process and you should not assume that once done, your will and trust and other documents will be appropriate forever.
SHOULD YOU CONVERT YOUR REGULAR IRA TO A ROTH IRA?
If you are eligible to convert, the answer is probably YES!If a single taxpayer (or married couple) has Adjusted Gross Income (.AGI.) of less than $100,000, an individual may elect to convert a regular IRA to a Roth. The taxable value of the regular IRA will be taxed currently (but there is no 10 percent penalty if you are under age 59 1/2). If you convert during 1998, you may report the taxable amount evenly over the next 4 years. A conversion after 1998 requires payment of all tax for the year of conversion.
The Roth differs from a regular IRA in the following significant ways:
- All distributions from a Roth are income tax free.
- Generally, distributions may be taken at any time without tax and without penalty.
- There is no requirement that distributions begin at age 70 1/2.
- The owner of a Roth may choose to take no distribution and leave the income tax-free benefit for children or grandchildren.
- Lack of eligibility because projected AGI is above $100,000.
- Don.t want to bother with the paperwork because existing IRA is too small.
- Don.t have an IRA.
A 55-year-old business owner has a $600,000 IRA which was a rollover from a previous employer's retirement plan. He has adjusted his compensation and other income to total less than $100,000 for 1998. His converted IRA will be included as income at the rate of $150,000 for each of the next four years. He has arranged a line of credit to finance the payment of those taxes when due. In 15 years, at 9 % interest, the Roth will be about $2.2 million. He can take distributions whenever he wants, or take none at all. All payments from the Roth will be income tax free. The original IRA would also have been worth $2.2 million. However, all distributions would be taxable, and he would be required to take payments at age 70 1/2. This individual is assured of a comfortable and .tax-free. retirement.Even if a regular IRA is small, it will be much larger in the future. Reporting a small IRA as income over the next four years may be somewhat painless, but will allow the Roth to be entirely income tax free 20-30-40 years from now. For younger individuals, a conversion should be almost automatic.
What if your AGI will be below $100,000 but you don.t have an IRA? Many individuals are participants in qualified profit-sharing plans maintained by their employer. Those plans could be revised to allow a distribution to an individual even if actively employed. The employee could .roll over. to a regular IRA, and then convert to a Roth. The profit-sharing benefit would be reported as income over the next four years (without a 10 % penalty). This will allow the benefit to be taxed now, at its current value, and avoid all future income tax as the benefit grows. The individual would continue to participate in the company.s profit-sharing plan as well.
Conversion to a Roth is ideal if you expect your income tax bracket to be the same or higher when you need the money. The savings are greatest if the conversion taxes are paid from other assets.
In most cases, a conversion of a regular IRA to a Roth, or a distribution from a profit-sharing plan, followed by a rollover to an IRA and conversion to a Roth, will reap substantial income tax savings in the future. If we can be of assistance in planning your conversion, please call one of our Employee Benefits attorneys.
THINGS TO CONSIDER BEFORE TRANSFERRING YOUR HOME TO YOUR TRUST
If you have a living trust, you may have considered transferring your residence to your trust. (See related article that follows.) Transferring your residence to your trust has a number of benefits:- it will avoid probating your home;
- it will keep the value and other information about your residence from becoming public;
- and it will insure the distribution scheme in your trust will apply to one of your most significant assets.
Homestead Exemption. Michigan taxpayers get a substantial real estate tax break on their primary residence. Losing the homestead exemption could cost you thousands of dollars a year. Transferring your residence to your trust will not affect the residence's homestead status as long as you or your spouse are the primary beneficiaries of your trust.
Title Insurance. Properly deeding your residence to your trust should not affect your title insurance. We generally recommend transferring the property via a warranty deed and not via a quit claim deed.
Mortgage. If your property is subject to a mortgage, you need to make sure that a transfer will not put you in default on your mortgage. So long as you or your spouse is beneficiary of your trust, transfer of property subject to a mortgage should not trigger acceleration under a .due on sale. provision, and the mortgage should remain in effect as it was before the transfer. You should check with your lender or review the mortgage to be safe.
Casualty Insurance. You should inform your home owner's insurance carrier of the transfer. The insurance company should show the trust as an additional insured on the policies.
Creditors. Finally, if you have significant debts, own assets which have the potential for claims, or participate in a profession where claims may be made against you, you may be giving up creditor protection if you transfer your home. This is because creditors cannot seize real estate which is jointly owned with your spouse. Therefore, transferring the residence to your trust likely places it at greater risk to creditor.s claims.
Documentation. To transfer the residence you will need to file a deed with the Register of Deeds, file a homestead update with the city or township if it is your primary residence, file a property tax affidavit with the city or township assessor and you may have to file a land division affidavit with the city or township.
If it suits your circumstances, due to the complexity of the issues involved, a professional should assist you in preparing all documents transferring your residence to your living trust.
FUNDING LIVING TRUSTS: MORE (AND LESS) THAN AVOIDING PROBATE
Many clients wonder whether they should fund their living trust during their lifetime. The following questions and answers address that concern.What is Probate? Probate is the post-death legal process by which your assets are administered and eventually retitled in your designated beneficiary's name. Michigan's probate process includes modern, streamlined alternatives, but all probate involves some delay of distribution of assets, cost and public notice. Only property in your own name at death is probated. Assets in joint name with rights of survivorship and contractual assets payable to a named beneficiary (such as life insurance) avoid probate. One form of Michigan probate proceeding, known as .independent. probate, is an informal probate process that seldom requires direct court involvement and, if death taxes are not involved, can be completed in as little as six months, with partial distributions of assets made prior to that time.
Isn't Probate Open to the Public? Wills and all probate proceedings are matters of public record and can be reviewed by the general public upon request. In addition, in a supervised probate proceeding, a detailed inventory of your estate is made part of the public record. Michigan independent probate, however, permits maintaining confidentiality as to the inventory. Funding your trust may maintain confidentiality with respect to the size and contents of your estate because a trust is a private document.
Can I Avoid Probate? Assets in a living trust avoid probate because you don.t own them anymore; the trust does. Transferring assets to or .funding. the trust during lifetime avoids probate of those assets.
How Do I Transfer Assets? You must transfer title to assets in your own name to your trust. Everyone's assets will differ, and the transfer effort involved will depend on the types of assets you own. Brokerage accounts are transferred by completing new account forms. Banks will require a change of account name as well. Transfers of real estate require detailed real estate documents and possible notification to lenders and insurance companies. (See related article.) Motor vehicles and boats are best left in your individual names because a sales tax may be imposed on their value if title is changed to the trust.
Who Manages the Property? The trustee of a trust maintains control of the trust assets. Most people serve as their own trustees of the trusts they create and therefore have complete control over the assets in their trusts. Upon your incapacity, the successor trustee takes over and manages the assets for you during your lifetime. This arrangement avoids the necessity to go to probate court and having a conservator appointed for you. At your death, the successor trustee manages the assets for the beneficiaries of the trust until the time of distribution.
Are Assets in a Trust Protected from Creditors or the IRS? There are no significant income tax advantages or disadvantages to funding your trust during lifetime. A living trust is taxable to you during your lifetime and all items of income, deduction and credit are reported on your individual tax return. There is no death tax advantage to funding your trust during your lifetime. All assets in your trust are taxable in your estate for death tax purposes. Placing assets in your trust generally will not protect the assets from your creditors. At the most, it may make it more difficult for a creditor to discover the assets. If you are indebted to a large degree, own assets that have the potential for litigated claims or are involved in a profession where claims may be asserted against you or your estate, you may be better served by leaving some assets in your individual name to be probated under court supervision. This is because under current law, probate has a set claims period for creditors, but trusts do not.
Does a Trust Avoid Challenges? Generally, the same rules apply to funded living trusts and wills in a contest by family members. Funding your trust during your lifetime will not prohibit a challenge from family members, but may make a challenge by beneficiaries more difficult, particularly if your estate passes to collateral relatives, charities or other individuals who are not immediate members of your family. Waiting until death to fund the trust means your heirs will be given notice of your will and for some it is important to avoid this notice.
In summary, funding your trust during lifetime avoids probate and its cost and avoids public notice. That advantage must be weighed against the expense and effort that must be undertaken to transfer the assets to your trust. Fully avoiding probate, especially given Michigan's streamlined probate procedures, is not for everyone, but should be a consideration during your planning.
THE ESTATES AND PROTECTED INDIVIDUALS CODE--AN INTERVIEW WITH JOHN MARTIN*
The Estates and Protected Individuals Code has just been enacted by the Michigan Legislature.Q. What is new about this Code?
A. It revises the law governing wills, intestate estates (distribution when there is no will), probate administration and trust administration. It essentially adopts Uniform Probate Code which about 20 other states have enacted, but with some significant Michigan variations.
Q. Do I need to change my will to respond to the new law?
A. No. First, the Code is not effective until April 1, 2000. But your will and trust will probably work just fine under the new Code. The changes primarily affect the manner in which estates are administered, but it is always a good idea to review your will and trust periodically.
Q. How did you get involved in drafting this legislation?
A. This began as a project which I chaired in October of 1988 to determine whether modification of the probate code or preparation of an entire new code was the best avenue. When preparation of a new code was the chosen route, I became reporter (principal draftsman) for the drafting project.
Q. How did the process evolve from evaluation to law?
A. It involved assigning drafting projects on specific issues to various attorneys involved in Michigan.s Estate Planning and Probate Council. I then edited their initial drafts. I and others on the drafting committee then made presentations to the entire Council. The Council made comments and we revised and edited the proposals. We continued to review and revise the drafts with the Council until we had a final draft which we could present to the Legislature.
Q. How did you get the bill introduced and passed by the Legislature?
A. The Code was sponsored by Senator William Van Regenmorter. I and others worked with the Legislative Service Bureau where the text of the proposal was put into bill form. We also coordinated efforts with the Section's lobbyist and gave testimony at approximately 10 hearings of the House Judiciary Committee and its subcommittee responsible for reviewing the entire bill. The committee finally approved the bill, and Michigan.s House Senate passed it in September of this year.
* John is a partner in our Muskegon office and was the principal draftsman of Michigan.s recently adopted Estates and Protected Individuals Code. He concentrates in estate planning, probate, federal income, and estate and gifts taxation law, with expertise in planned charitable giving. John is a Fellow in the American College of Trusts and Estates counsel and is listed in The Best Lawyers in America. He is a former Professor of Law in Estate Planning and Gift and Estate Taxation at the University of North Carolina School of Law. John is also licensed to practice in Florida and North Carolina. (University of Michigan, J.D., 1966.) When John is not working with clients and drafting legislation, he enjoys working on projects at his home in Spring Lake.
TAX UPDATE
New Business DeductionEarlier this year we told you about a new business exclusion from estate tax for family owned business. That has now been changed to an estate tax deduction and is limited to $675,000. A number of tests must be met at the time of death in order to take advantage of the deduction. Consult with a member of the Trusts and Estates Group to learn more.
IRS Reform
As part of the 1998 Tax Act, a number of changes are coming to the IRS. Perhaps the most important is a change in the burden of proof from the tax payer to the IRS with respect to a factual issue to determine tax liability. The taxpayer must present credible evidence with respect to that issue and satisfy three conditions: proper record keeping, cooperation with the IRS, and, in the case of taxpayers other than individuals, net worth is less than $7,000,000. Other taxpayer rights are also part of new legislation.
Capital Gains
- Long-Term Capital Gains. The 18-month holding period devised under the 1997 tax act is eliminated. Long-term capital gain later applies after holding an asset 12 months.
- Homeowners. 1997 law allowed an individual to exclude up to $500,000 of gain on the sale of his or her home provided it was used as a primary residence for at least 2 years. A change in the law allows those who fail to satisfy the two-year ownership rules to exempt a portion of the gain based on the fraction of the exclusion proportional to the ownership and use over the two years (i.e. if you owned and used the home for 1 year, you would be entitled to one-half of the exclusion).
As this newsletter goes to press, the stock market is down by almost a thousand points from its high in July. If you made a conversion of an IRA to a Roth IRA when the stock market was at its peak, you may reduce the tax liability by undoing that conversion and reconverting today at a time when your portfolio is less.