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Putting residence in revocable trust has ramification
Q. My wife and I have a revocable family trust. Should our personal residence be in this trust? I cannot get definitive advice. We are permanent residents of Florida.
A. The reasons to put a house in a trust are the same as those for putting any other asset in a trust. Ownership through a revocable trust simplifies the transfer of your property at your death and makes possible the management or sale of your property if you become incapacitated. If it's done right, it does not affect the $25,000 homestead exemption from property taxes.
The reason not to put a house in a trust is to be assured of maximum protection from creditors' claims under Florida homestead law.
Clearwater lawyer Alan Gassman said that in a recent bankruptcy court case in Jacksonville, the judge ruled that a home owned by a revocable trust would not be protected from claims of creditors. Although he thinks the ruling was incorrect, Gassman said it probably will be years before the issue is resolved.
"This is just another reminder that the creditor exemption laws are always subject to challenge and interpretation," he said.
Gassman said one alternative would be to put a house in the name of a trust, then transfer it to your own name should you ever contemplate filing for bankruptcy.
"But you have to move it out before you go bankrupt," he warned. "You can't forget."
Gassman said he prefers for clients who have a high risk of being sued to keep their homes in their own names rather than placing them in a trust. But he said each client's circumstances have to be considered.
"When a client comes to me and they're 86 years old and we don't think there will ever be a creditor, we'll put it in the trust," he said. "If a client comes who is a 45-year-old neurosurgeon, that's one I'm going to put in person's name rather than a trust.
Q. I am a 69-year-old senior citizen and may need some cash in the near future. If I withdraw money from my 401(k) plan, what penalties will I incur? If I wait until I'm 70, would there be any advantages?
A. Because you are older than 59 1/2, you need not worry about penalties. The main advantage of waiting is that your money continues to work for you on a tax-deferred basis. Unless you empty your account now, you still will have to take required annual withdrawals after you turn 70 1/2.
Q. I am 68. I am considering starting now to take withdrawals from my individual retirement account. I want to reduce the size of my IRA and take advantage of the new 10 percent tax rate. I would put the money in a tax-free bond fund and let it grow. Does this make sense, or will I have to pay more taxes?
A. It makes a lot of sense to look at your overall tax situation when planning IRA withdrawals. If you would pay a lower tax rate by starting your withdrawals now, then by all means go for it. If the tax rate would be the same both now and later, you might as well wait and get the benefit of a few more years of tax deferral.
Q. I purchased AT&T in 1986 and still have it plus the Baby Bells and spinoffs. I am interested in selling some of them now. Do you know how I can figure my cost basis?
A. AT&T has information on the splits and spinoffs on its Web site (www.att.com). Click on "investor relations" and then on "tax basis information." Horizon Publishing Co. also sells a small book, AT&T Tax Wizard, for $14.95, including shipping. Call 1-800-233-5922.
Unless you want to pay taxes on the entire proceeds of the sale, you need to make an effort to reconstruct your cost basis. One alternative, of course, is to die with the shares as part of your estate. Your heirs then will get the benefit of having the tax basis "stepped up" to the shares' value at the date of your death.
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If you like keeping up with economic news, check out the National Association for Business Economics Web site. Click on "economic links" for links to data sources and a roundup of economic think tanks.
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
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