I wanted to bring “everyone” up to date on my relocation and on the situation with the increased funds available in my mother’s trust.
I did close on the trust house on Oct. 10, and on a purchase of a new condo right away on Oct. 11. All the paperwork and internal wire transfers were done by Oct. 13. I moved into the new condo near Falls Church, VA on Oct. 18. Junk removal and a small amount of possible hazmat liquid removal was completed by Oct. 25. I was permitted free entry into the home until Oct. 31, and that time has elapsed. All ties to the property are essentially terminated or in the process of expiring. I noticed a rather frivolous sign on the front lawn, “Houses for cash”, which doesn’t make the best impression in my opinion. It could make a casual neighbor believe that “something happened” to me, but that can be how it is.
I’ll come back to the subject of “downsizing” in more detail, with more “tips” for others and answers to questions as I encountered them with a future WordPress posting on my News Commentary blog.
My main concern today is reviewing what should happen with the two trusts and with my own funds.
It’s well to review what usually happens when an adult child “inherits” through a parent-named trust. Typically, probate is avoided. But trusts often specify slow distribution schedules to potential beneficiaries (including the principle, the adult child, that is, me) in order to make sure that all potential liabilities are met, and that sufficient funds to take care of the “adult child”, especially if he is elder himself (a more common situation nowdays with longer lifespans) for the foreseeable future remain intact. Typically a trust pays for the housing of the adult child before there is distribution, and encourages proper preventative medicine and the purchase of a long-term care policy.
In my case, that would suggest funds for the expected taxes, condo membership fees, repairs, and normal property insurance should be set aside and not distributed, and that the property remains in the parent’s trust name. Some people may see this as controversial, and that idea I’ll take up in the future on the News Commentary blog.
The 2012 Interpretation and Amendment document, Article II Section 5, specifies that 25% of the Trust can be distributed to me outright, and the rest held for my “benefit” (as well as for other beneficiaries listed). The earlier 2009 document had distributed 5% of liquid assets to certain beneficiaries (just one, it turns out) and 25% the trust outright to me. The “held for his benefit” clause means that the first priority is making sure that the reasonably anticipated expenses related to housing and supplementary medical care are met for, in my case, probably the next twenty years (which would be to age 94).
What has happened in practice is that 25% of the liquid assets were distributed to me in September 2011 and placed in my name only. Some unclaimed securities were discovered later, and 5% of those monies were distributed to others. I did not take additional distribution on those. However I did buy long term care insurance (single premium about $100000) and paid for dental implants in 2013 (about $65000, not normally covered in insurance of Medicare).
Right now, there is slightly more than $900,000 in assets all relative liquid (securities, exclusive of real property) in mother’s trust name, as well as slightly under $100000 for the single premium long term care policy.
By selling a $600,000+ property and buying a $200000 property for replacement, there is an increase in cash liquidity of about $400000 (after allowing for moving expenses, legal fees, commissions, etc). In the old house, there was a high property tax and some concern of potentially high repair costs in the future. In the newer environment, the lower property tax plus condo fee are less than the old property tax, although there is less tax deduction (which is up in the air with Trump’s tax plan anyway).
It is my opinion that among the $900,000, a set aside of $200,000 in funds that cannot lose principal in normal operations would meet the twenty years expense requirement. Currently, for example, condo fees and taxes would add up to about $7000 a year (of $140000 over 20 years, although this can increase). In addition, the long term care policy would need to remain in effect.
I do believe that the “25% outright” distribution means in this case, 25% distribution of liquidity, assuming there is enough money after the 20-year setaside. Other beneficiaires (there is just one affected by the provision) should get 5% of the increase in liquidity from the sale. And a somewhat generous contribution to humanitarian relief efforts, at least from the three major hurricanes or wildfires, would seem to be in order. I could try to align these with other named charitable beneficiaries or with others (especially in Texas, possibly) who could have some connection to me.
I would like to distribute about $45000 (25% of the discovered funds) to myself, and then from the $400000 liquidity increase, about $10000 to my own trust. It should be noted that III-8, p. 3, would seem to require me to put reasonable funds in my own trust.
Let me cover two possible other areas of controversy. One is that Trustees are normally required to furnish annual reports to beneficiaries (who may include parties who do not get distributions during the lifetime of “me” but who would benefit on my death, and who could include both persons and organizations). I have been keeping the persons informed on what is going on, and I don’t believe that the organizations want reports based on the idea of my death in two more decades; they want money now!) To some extent, these TWIMC public blog postings constitute those reports. However, Article 5, Section 18F on page 10 would seem waive me as a grantor from a legally driven reporting requirement.
I note also that under the Introductory Summary 1C, as grantor I have the power to sell or exchange property for other property of like value. It is not absolutely clear if this refers primarily to real property or also applies to personal property (like securities) but it would invoke IRS Rule 675.
Section 4 of Article II, p. 3, gives me the power to live in real property owned by the trust or substitute property placed in it, and keep the profits or rents returned from it.
But it is worthy of note that the $400000 increase in liquidity does not constitute “profit” in the normal accounting sense. The “profit” could be related to an increase in value since the last sale to the trust on July 4, 2009. (That can be taxable, but this gets beyond the scope of this post; seniors have some exclusions). Profit could also be realized by setting up the house, or any assembly of homes and condos (not sure about coops, which are personal property legally) as a “company” and renting them out, either with long term leases, or with short term rentals like Airbnb (which allows the owner to live on the property in separate quarters), which was permissible on the old property but not on the new. In any case, I sold “as is”, which is permissible under 675 but which might not seem to fit the spirit of Section 4 above. Inheritances can come with strings attached, and challenge beneficiaries to enter activities in which they are not particularly talented. (That is one reason why the GOP makes so much of wanting to repeal the death tax.) Think about how many small businesses and especially franchises are handed down through families. In any case, operating real property is not one of my skills. I’d rather downsize, have the cash and liquidity (as well as some immunity from possible enemy activity in the future against the value of land) and focus on the skills I do have. Let a party who knows what he/she is doing refurb it, and a large family will wind up living there. True, though, this means I am, for example, no longer able right now to consider hosting asylum seekers or refugees. But a large family might be able to.
Finally, it’s important to note, as I did here on Aug. 12, 2014, that my own trust and will changes the dispensation of assets were I do perish in an act of crime, war, terrorism, or especially politically motivated violence.
(Posted: Monday, November 6, 2017 at 3 PM EST)