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Consult attorney to best explain TOD deed

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Q: My wife and I own our house as joint tenants with rights of survivorship. We don’t have much else and we live off my pension and our Social Security. We want to leave the house to our son and we heard that a transfer on death deed is a way to do this without probate. We have lived in the house since 1966 and it is worth a lot more than we paid for it, and we want to make sure that we will not need to pay a gift tax and that our son will get a stepped-up basis when we die. Will a transfer on death deed cause us any tax problems?

A: A transfer on death (TOD) deed is fully revocable by you up to your death, so there is no gift made when the deed is first executed and recorded.

The TOD deed would not transfer ownership to your son until both of you have passed away, and at that time your son’s income tax basis will become the fair market value of the house.

The TOD deed will not change the tax result, either income tax or transfer (gift and estate) tax, compared to what would happen if you continued the current form of joint ownership. You can revoke the TOD deed at any time, or change the beneficiary of the deed at any time.

I would strongly advise you to consult with a real estate attorney to help you execute and record the deed, and make sure you fully understand the implications of the TOD deed.

You may later decide that you want to sell the house or to borrow against it and while a TOD deed should not prevent these actions, you should have an attorney explain the process to you. The attorney could also explain what rights creditors of your estate may have against the property.

You may also have, or need, to execute a power of attorney (POA) in the event you become unable or unwilling to deal with your affairs, and the POA should be drafted with the knowledge that your most valuable asset has a recorded TOD deed.

So while a TOD deed will not create any tax problems for you, I do think it’s important to have an attorney explain the entirety of the non-tax issues associated with TOD deeds to you.

Q: I am considering setting up an Health Savings Account and I would like to know if you think any of the tax-reform proposals that have been discussed will affect how these accounts are taxed. I’m afraid with the budget situation that Congress will act to tax these accounts.

A: A Health Savings Account (HSA) operates like an IRA, except the purpose, and therefore the operating rules, revolve around health-care costs rather than retirement costs.

Contributions to an HSA are tax deductible, earnings grow tax free, and withdrawals are also tax free provided they are used for qualifying medical costs. So if used for medical costs, HSAs actually beat IRAs because you may be able to completely avoid any tax burden, and there are no minimum required distributions.

HSAs are designed to provide tax incentives to sign up for a high-deductible health insurance plan (HDP) that results in you bearing all or a significant portion of your health-care costs.

A HDP must have a deductible of at least $1,200 (self) or $2,400 (family) with maximum out-of-pocket costs of $6,050 (self) or $12,100 (family), and allow annual contributions of $3,100 (self) or $6,250 (family), with an added $1,000 allowed for those who are 55 or older.

HSA fund withdrawals can be taxable if used for other than qualifying medical costs, and may also be subject to a penalty if taken for nonqualifying costs before age 65.

I don’t think Congress will change the tax treatment of accounts already established. The concern at this point is how the Affordable Care Act (ACA) may affect the viability of HSAs.

The ACA requires that insurers bear a certain percentage of medical costs. Most HSA owners do not have costs above the deductible. This means the plans that fit the HSA requirements may not fit the ACA requirements.

James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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