1. PROBATE AND TITLE PROBLEM: Dave is a horse trainer with a small farm as his b
ID: 2612214 • Letter: 1
Question
1. PROBATE AND TITLE PROBLEM:
Dave is a horse trainer with a small farm as his business location. Dave is a sole owner/proprietor of the business and he is in failing health.
There is not thought to be any operation value for the highly personalized business after Dave’s death, other than the $800,000 value of the land and barn.
· Dave purchased the property nearly 30 years ago for $175,000.
· Sandy, Dave’s wife, is not currently a joint owner of the operation, nor does she have interest in continuing the business when Dave is gone.
· Sandy’s preference will be to sell the barn and training site after Dave’s death and move to Florida. Assuming 5% probate cost and 15% capital gains tax, which method of titling this property could prove to be better for Sandy, post mortem?
2. PROBATE ESTATE PROBLEM
Tom and Mary were married years ago and had one child, Amber. Tom and his partner Dave were recently flying in Dave’s new plane. For a brief period, Dave was distracted and lost control of the plane.
Unfortunately, the plane crashed and Dave died instantly and Tom died a few days later as a result of the injuries sustained during the crash.
When Tom died he and Mary owned the following property:
* Home valued at $500,000 held JTWROS with Mary
* Car 1 valued at $10,000 held by Tom’s business
* Car 2 valued at $15,000 held Joint Tenancy with Rights of Survivorship by Tom and Mary
* Rolex watch valued at $50,000 held fee simple by Tom
* Boat valued at $20,000 held tenancy in common by Tom and Dave
* Life insurance Policy 1 on Tom’s life, owned by Mary. The fair market value of the policy was $100,000 and the death benefit was $200,000. The beneficiary is Amber.
* Life insurance policy 2 on Tom’s life, owned by Tom. The fair market value of the policy was $85,000 and the death benefit was $500,000. The only beneficiary is Mary.
* Non-qualified investment account valued at $2,000,000 owned by Tom, and Mary as the T.O.D.
Explanation / Answer
Sole Ownership
When the title is in the name of the deceased husband alone and you want to sell the house , you may have to file a petition to the court for an order that establishes record ownership for the surviving wife. In this case, the probate process will have to be followed which may take months or even years to complete. If the deceased spouse has no will or leaves a will specifying that his interest in the house passes to his surviving spouse, an abbreviated procedure called a Spousal Property Petition may be used to transfer the deceased spouse’s interest to the survivor, offering a faster alternative to the probate process.
Also, in this case, 5% probate cost will be incurred which amounts to 0.05*800000 = $40000.
However, if Mary sells the estate for $800,000 only which is the market value at that time, she will not have to pay any capital gains tax because if you inherit the you may be liable for Capital Gains Tax if you go on to sell these assets. But you’ll only pay tax on the increase in value between the date of the deceased’s death and the date when you sell the asset
Net amount that she will receive assuming she sells the estate for $800,000 = 800000 - 40000 = $760,000
There are methods of titling which could have proven better for Sandy in this case as they would have avoided the probate process which is long as well as expensive.Some of them are:
Howerver, in the above methods, capital gains tax would be applicable. the step up clause will be availalabe for only the deceased owner, that is, the cost of the property for cpital gains tax computation would be .5 * (800000 + 175000) = $487500
Thus, capital gains tax = 0.15 * (800000-487500)
= 0.15 * 312500
= $46875
Net amount that Sandy will receive = 800000 - 46875= $ 753,125
Thus, Sole/Single ownership would be a better titling method for Sandy as she will get $760,000 in that case which is more than $753,125 received in case of joint ownership.
The best method, however, would be:
Community property with right of survivorship. If you are married ( another way to co-own property with your spouse is available to you: community property with the right of survivorship. If you hold property in this way, when one spouse dies, the other automatically owns the asset. In this case, you do not have to go through the probate process and also the cost is marked up to the current fair market value ($800,000 in this case).
Thus, in this case, probate cost of 5% as well as capital gains tax is saved (if the property is sold at $800,000).
So, net amount in thand of Sandy = $800,000
Thus, community property would be the best titling method.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.