Death and Taxes

 Reader Question:  My dad deeded his house to my sister and me in 2004 with a deed that had a life estate for him until he died.  He died last March.  We were able to sell his house a few months after his death.  Will the basis for the sale be what he paid for the house in 1995 or what it was worth when he deeded it to us in 2004?  S.W.

  Ross Cohen, an estate planning specialist and partner at Haskell, Slaughter law firm in Birmingham, Alabama says, "Because of the manner your father conveyed his house to your sister and you, retaining for himself a life estate, even if his estate was not large enough to file an estate tax return or to pay estate taxes, upon his death, your sister and you will acquire a basis in the house for income tax purposes equal to the fair market value of the house at the date of your father’s death.”   I suspect this is very good news to you.  Because this is a technical area of the law and we did not review your actual deed, we strongly encourage you to have your own tax advisor confirm this advice. 

Reader Question:  I am a seventy-eight year old widower in excellent health.  I have about $200,000 invested in CD’s and savings plus about $4,000 per month from Social Security and my government pension.   My goals are to receive more income from my investments than I’m currently receiving in interest from the bank and to make sure I have money available should I need in-home or nursing care.  I’d also like to leave as large an inheritance to my son as possible.  What do you suggest?  C.T. 

Answer:  Let’s approach your situation from two different angles.  The most conservative approach would be to maintain your $200,000 in securities that are ‘safe’ from the risks associated with the ups and downs of the stock market.  Unfortunately, this means accepting the low interest rates that are prevalent today.  I would expect that rates will begin to rise within the next three years so you’ll need to be patient.  A more aggressive approach would be to look at your pension and Social Security like they are part of your ‘safe’ portfolio and be willing to be a little more aggressive with at least a portion of your $200,000.  You could take part of this money and invest in big blue chip dividend-paying stocks.  Companies like Southern Company, McDonalds, Exxon and General Mills all have a long-term history of consistently paying dividends to their shareholders.  Today, their dividends are two times or more what you can earn on CD’s, money market accounts or short-term, high quality bonds.  For diversification, be sure you own a minimum of twenty different companies across at least six to eight sectors (energy, financial, consumer staples, etc.). 

Follow up comments on property tax exemption:  I had a large number of inquiries following my brief response to a reader’s question about how you can qualify for an exemption from property taxes on your home.  One of my partners, Kimberly Reynolds, MS, CFP®, offers these details, “To qualify for a property tax exemption, you must own and occupy the property as your primary residence with at least one owner being age 65 or older.  More specifically, you must turn age 65 by September 30, 2013 in order to qualify for the exemption for 2014.  If your taxable income is $12,000 or less (as reported on your federal tax return), all property tax is exempt.  If your taxable income is above $12,000, you still receive 100% exemption from the State of Alabama property tax but county, school and municipal taxes will still apply.  To apply for the exemption, contact your county property tax assessor’s office.  You’ll be required to fill out a form annually that certifies that the home is still your primary residence and disclose your taxable income for the prior year.  If you are blind or disabled contact your county property tax assessor’s office to determine if you qualify for a property tax exemption.” Click Here for chart.