Does a Trust Retains Ownership of 529 After the Death of the Grandparents? |Weekly Wednesday Wisdom Webinars

Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers retirement and estate planning questions every Wednesday at 1pm.

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Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi offices.

On this week’s webinar, attorney and advisor Chris Berry of answers the below questions.

  • 0:00 Introduction / Positive Focus
  • 1:53 Does cost basis transfer between spouses? Are there any strategies available if the step-up in basis is removed?
  • 8:39 Who should own a 529?
  • 10:52 What options are available for paying for school for grandkids?
  • 14:00 Does a Trust retains ownership of 529 after the death of the grandparents?
  • 14:21 Is money that comes from you’re IRA is transferred to a 529 is it taxed?
  • 14:57 At the time of death does the existing Michigan Educational Savings Program
    beneficiaries grant prevail or do the Trust beneficiaries supersedes?
  • 16:09 What is a CRT and how does it work? Is it viable to stretch out payments of IRA’s past the 10-year stretch of the Secure Act?
  • 20:17 I have a home titled to the Castle Trust, is my title safer from title thief or should I purchase title lock security?
  • 23:32 If you sell a commercial property, how does the tax 1030 or 31 exchange works?

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Episode Transcript

Or feel free to use the chat. So my name is, of course, Chris Barry guess wealth group. And we do these weekly wisdom webinars every week where we answer legal, financial and tax questions that people, either our clients or friends or family, submit to us. And you can either submit questions to us ahead of time, or right here live, and I’ll try my best to answer them as we go. And if something is unclear, feel free to jump in the q&a or put it into the chat. And I always like to start with a positive focus something positive that happens within the last week or so. And it’s pretty easy for me to have a positive focus took a five day vacation with my family. So that was pretty darn nice. And whoops. Oh, technology. All right. Now, you should be seeing my screen in just a moment. All right. So if you do have questions, feel free to reach out to us reply to the email, or you can always go to www dot 15 to book some time on my calendar to talk about any questions you have. So this is kind of general advice. I wouldn’t act on it until we have a conversation about. And with that, let’s get into the question. So the first question
was, all right. This other way, so I can see the questions. So does cost basis transfer between spouses? Are there any strategies available if the step up and basis is removed, and I kind of summarized some of the questions that were submitted, and some of them are, were pretty detailed. So I’m just kind of summarizing things. So we need to talk about basis. Something that’s a little bit in the news, because of some of the proposed law changes, tax law changes. Think of basis like this, you buy something for $100,000, could be stock could be real estate, and then it grows in value. And let’s say it grows to 200 1000s. And then let’s say you pass away. And then let’s say the kids sell it for 210,000.

So real quick, just a basis generally is you buy something in basis really only applies to the taxable bucket. So if we have our tax buckets, we have taxable, we have tax deferred. And we have tax free. So tax free is things like Ross cash value life insurance, we call it a well indexed universal life, tax deferred. That’s your IRAs, 401, K’s and then taxable is like brokerage accounts, real estate, checking savings, etc. So it’s important to understand that these are taxed at capital gains. So you’re taxed on the growth. tax deferred is taxed at income tax rates. So when you pull any money out, it just it’s added on to your marginal income tax bracket. And capital gains, depending on your income level are either not taxed, taxed at 15%. Or taxed at 20%. As of right now, again, there’s some proposals to say that these numbers may go up in the future. But as of right now, these are the current capital gains brackets. So if you buy something for $100,000, and you sell it for, let’s say, one 150, you have $50,000 worth of capital gains, right. But the question was, what does cost basis transfer between spouses? And the answer to that is that you get a step up in basis when you die regardless of whether you’re transferring it to a spouse or child, a friend anyone else. So the way it works is if you if let’s say you buy something for $100,000 you pass away, it’s valued at $200,000. And then someone sells it whether it’s a kid, a spouse, or anyone else sells it for 210,000. Right now you get a step up in basis where it Instead of oops, I did that wrong, to back that up to redo. So, right now you get a step up in basis where it data death. That’s when it steps up and you look at the fair market value, so it’s 200,000. And then if it’s sold for 210, you have the kids, or whoever sells it, whether it’s a spouse, or anyone else would have capital gains of $10,000. Okay, because of step up and basis.

Now, what, in one of these tax proposals is getting rid of step up and basis? It’s kind of a sneaky tax, because a lot of people don’t fully comprehend how basis works. And so now, or if this proposal does go through, same situation, there’s going to be $110,000 worth of capital gains, that whether it’s a spouse, whether it’s a child that they would have to cover in terms of their own taxes. So is there a cost basis transfer between spouses, it really doesn’t matter who the person is, you get a step up and basis right now. Now, community property states work a little bit different, like California. But still everyone gets a step up and basis at deaths. As of right now, that could change in the future, because there is a proposal to get rid of that step up and basis. And so then it becomes a question of Okay, given that, maybe there is going to be be a change, are there any strategies available, if step up and basis is removed? We haven’t, I guess, necessarily gotten that far, because the proposal isn’t law yet. But I will share what some of my clients have done is, given the uncertainty moving forward, they’ve taken a lot of those gains. Now, to lock those in, whether it’s a business that’s being sold or selling a piece of real estate not doing an exchange, they’re just taking the gains now, because of the concern of capital gains going up in the future, and also the potential loss of step up and basis. So just easy, relatively easy solution right now, would be just take the gains now. It doesn’t avoid the gains, but I’d rather pay at say 20% or 15%, instead of say, 40%, for capital gains, or I wouldn’t want to necessarily pass it down to the children, or maybe you do want. But yeah, so that’s something that we’re certainly watching as we’re seeing kind of what’s going to make it through in terms of law changes. So yeah, yeah, basis, again, basis is only going to affect the taxable account. It’s not affecting tax deferred or tax free. So sometimes people worry about kind of basis and stocks and IRAs and that type of thing. It doesn’t apply, because anything you pull out of IRA is tax, state income tax shows up on your income tax, not as capital gains. So hopefully, that was helpful one. Let me see if we have any questions submitted no questions so far.

Then who should own a 529? what options are available for paying for school for grandkids? So we’re talking about 529 529, fall into the tax free bucket, meaning the growth in 529 is tax free. So that’s kind of a nice thing is you get tax free growth, so we don’t have to worry about basis in 529. But typically, who’s the owner of the 529? Typically, the owner, you have a couple options. In this situation, it could be grandparents could be the parents. But we would not have the or Yeah. And then the beneficiary is the child who we think will be going to college. And the Oh, also owner can be a trust. So a lot of times, if you do have a trust, we typically recommend that you just named the trust as the owner, because it’s, God forbid something happens to you. You have your successor trustee who can step in and still manage it for the benefit of the child. So typically, if you have a trust, we’d recommend the trust is the owner. Now whoever the owner is, they can always change, they can change who the beneficiary is. So let’s say that you set up a beneficiary for you set up a beneficiary, or you set up a 529 for one of your children, but they end up not going to college, you as the owner can change who the beneficiary of that account is, or whoever the owner is. And that could be you. That could be your trust. So yeah, typically, we’d recommend the trust is the owner of the 529. And then the beneficiary of that would be the would be the child and the owner of that can always change who the beneficiary is. So that brings me to the follow up question, what options are available for paying for school for grandkids? Uh, well, you can use really any type of accounts, you could use just taxable money brokerage accounts. You could use kind of wages or salaries coming in. But if you’re talking about like setting up an account in the most tax advanced stages way, we look at what are the tax free options that we typically see. So these, again, are your tax, this is your tax free bucket of options. 529 has to be used for education, health savings accounts have to be used for healthcare, so that doesn’t work.

Roth’s potentially like you could, if you’re over 59 and a half, you set up and you have a Roth you can pull the money out and give that money to the child. So the Roth would have to be in your name, not in the child’s name. And then cash value life insurance. So my kids are 10 and eight, or 11, and eight, my son just had a birthday. And so what I’m using to fund their college is I have 529 set up for both of my children. And today was their first day of school, sixth grade and second grade, third grade. Yeah, I’m blanking. Yeah, but today was our first day of school. So I have 529 set up and 529 kind of participate in the market. And then also I have cash value life insurance that I’ve structured so that I’m going to pull money out to help pay for college as well both of these grow tax free, the IU L is protected from market downturns. So it’s just creating some diversification. Where if the market drops, if the market drops right before I’m gonna pay for my kids college education instead of saying to Ryan, imagine instead of getting four years you’re only getting two years, I’ve created some diversification where I can pull money from the 529 I can pull money from the IU l both of them grow tax free 529 has to be used for education, it well can be used for other things. I’m going to continue to funds my IU l until retirement so that in retirement, I’m going to have to tax free income sources, the Roth in it well, similar. Roth typically grows like that they well grows like that. So those would be the typical ways that you would look at tax free funding of college education. You could 529 is an obvious answer. Depending on your age, and when your child or grandchildren will turn 18. And depending on what your age is a Roth could work if it’s in your name, and then you could utilize I ul as well. A couple follow up questions on the 529. One other question on the castle trust, I’ll get to that in a second. Does a trust retain ownership of 529? After the death of the grandparents? The answer to that is yes, the successor trustee would then be the one owning or managing that 529 for the benefit of the beneficiary. So that’s why we typically recommend naming a trust is the owner of the 529. Is money which comes from your IRA is transferred to a 529 is a taxed. So yeah, if you’re pulling money out of a traditional IRA, anytime you pull money out of that that’s always going to be taxed. If it’s coming out of a Roth IRA, it is not taxed because it grows tax free. So anytime you pull money out of an IRA, traditional IRA, that’s pre tax, you’re going to be taxed. We call that the always tax is money which come I just answered that one at the time of death does the existing Michigan educational savings program beneficiaries are going to prevail, or do the trust beneficiaries supersede the. Okay. Yeah. So the question is, okay, let’s say we have a trust. And the trust lists the beneficiaries is like the kids would, but the beneficiary of the 529 is the grandchild. So which controls?

Well, beneficiary designations are always control. So the 529 would still control. But I would just make sure that the trust also lists that the 529 would be held for the grandchildren. So the beneficiary designations would control. But I would still make sure the trusts list the same thing. Just so they it’s coordinated, there’s no questions or no issues. Alright, so that’s it. I’m 29. What is a CRT? And how does it work? is it available stretch out payments of IRA past the 10 year stretch? Alright, so this was a complicated question that came in. So what is a CRT could be a lot of things. But in this situation, CRT stands for charitable remainder trust. And there’s different types of these. But a lot of times, these are used to avoid typically estate taxes. They were used a lot in the past when the estate tax exemption was much lower. Because it removes the IRAs by naming a charity as the remainder beneficiary, you can create an income stream, but then the charity or the IRA goes to charity, so it’s removed from your estate. It is irrevocable. So you have to be careful if you’re doing a charitable remainder trust or if you’re naming a charitable remainder trust as a beneficiary of an IRA. But it is a viable way to create income that lasts longer than the 10 year stretch or the secure act. So just kind of a little background, the secure Act passed in 2020. And the big thing that it said is that any IRAs prior to the secure act, you could stretch out, if you inherited IRA, you could stretch out the payments and the tax over your lifetime. But with a secure act set is now if you inherit an IRA, all the taxes have to be paid within 10 years. So if you’re looking at creating a longer income stream than that, that’s where trusts can provide a role. Now the taxes have to be paid. But a trust could with a trust, you could pay the tax in the IRA, but then maintain a longer income stream. So if you’re just looking at kind of stretching out the payments, to a beneficiary, we don’t necessarily need to use a charitable remainder trust. We can use any type of trust, but we just have to pay the tax within 10 years. That doesn’t mean that everything has to be distributed to the beneficiary within 10 years. So again, we’re just focusing on what is the goal, then let’s figure out the strategy. And then make sure to pick the right tools. So a charitable remainder trust might be a little bit of overkill depending on what your goals are. But what a charitable remainder trust can do is it can lower your taxes for estate tax purposes and remove whether it’s IRA or highly appreciated stock from your estate. If it is highly appreciated stock. I guess that’s a way we can get around to kind of that basis issue as well as if you do have some low basis stocks, charitable remainder trusts, move it into a charitable remainder trust, you would receive income or a beneficiary would receive income.

But now that stock or that IRA at the end of the day would end up going to a charity. So yeah, there, you we can use different types of trusts, including a charitable remainder trust, as a way to stretch out payments of IRA money, you just have to pay the tax or if you use a charitable remainder trust, then there is no tax, because now it’s going to charity at the end of the day. So again, if your goal is to kind of create income longer than 10 years, we can really use any type of trust we would only use a charitable remainder trust if there was a reason why. So I’m a big fan of Not over complicating things, trying to keep things as simple as possible. So, alright, then we have one more question that was submitted as I was chatting. So if you do have any additional questions, please put it into the q&a section. Have a home titled in the castle trust, okay, so we have a home, and we’ve moved it into our asset protection trust, which is always a good idea if you’re concerned about creditors lawsuits or nursing home care is, and again, this is different than a revocable trust, revocable trust does not protect you against creditors lawsuits, or nursing home care, and asset protection trust debts. So I have my home now in a castle trust. Is my title safer from title theft? Or should I purchase title? Block security? Okay, so this question comes up, actually, quite frequently now. So title, I look just call it title insurance or identity theft. So I think there’s these commercials running. Where they’re saying that someone can kind of record a fake deed and now kind of owns your home. It we do, probably, I’m guessing conservatively, 500 deeds a year for our clients. So we’re doing quite a bit of real estate work. And we’ve been doing this for 16 years. And in my time, I have not ever seen any issues with regards to someone stealing title, or recording fraudulent, tighter title or any issues and popping up from that. So I kind of view this insurance. It’s a good marketing ploy. But I wouldn’t necessarily recommend running out to purchase it just because in my 16 years of doing this, and all the deeds that we’ve recorded, I’ve never seen this as an issue. So I’m not saying it never could happen. But to answer the question, Does a castle trust kind of add any additional protection to this someone like recording a fraudulent deed? The answer’s no, because it’s still recorded at the county. So anyone can look to add at the county website to see what was the last recorded deed or see the chain of title. And that’s another reason why I’m not really recommending people to run out and get this title insurance. Just because it’s pretty darn obvious. You just go to the website, and you can see that the chain of title. Does that mean someone can’t record a new deed? The answer’s no. Like I could record a quitclaim deed on anyone’s house if I wanted to say that I’m now the owner. But, again, simple title search would would prove otherwise. So I guess at this point, I haven’t seen a need for anyone to purchase this kind of title insurance. I’m not saying identity theft is an issue, but this kind of like fraudulent conveyance concepts.

With real estate. I haven’t seen that as an issue. So no, a castle trust doesn’t provide additional protection against that. But that’s, that’s at least as of right now. It’s not something that I’d be losing sleep over. So hopefully, that was helpful. Alright, a few other questions came in. But if you sell commercial property, how the tax 1030 or 31 exchange works? Yeah, so. So let’s say you have a property, and then you sell it. And then you, if you sell it within a certain timeframe, I don’t say 45 days and you purchase a new house or new commercial property, then you don’t have to recognize any capital gains on that. So I had a client. So again, kind of getting back to what we’re talking about a year basis and gains. If you sell and you purchase and then purchase a new property, I want to say within 45 days with those funds, then you don’t have to report any capital gains. So some people just kind of keep buying and buying and buying. But like I talked about, I have a client right now, they sold their rental, and they were considering buying another property too, so that they don’t have sure the capital gains but they decided, hey, based on the fact that we think capital gains are going to go up and we might lose a step up and basis it might be better to take the capital gains or take the gains now versus later. So with second pieces of property, commercial property if you sell and then purchase another one Within one to say 45 days, then you don’t have to recognize any gains. And so some people just keep doing it. But again, given the potential changes in law tax code, it might make sense to realize those gains now and re establish a new basis before capital gains go up. Alright, any other questions? Please put them into the chat now. Gone once gone twice. Alright, done and done. I want to thank everyone for attending. Hopefully you found this educational. I always love doing these. And if you do have questions, feel free to submit them via email and I’ll go ahead and answer them live. So with that up someone wrote in thanks Yes, education.

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