Take Your Tax Ceiling Ratio With You

If you are a Texas homeowner, you are likely familiar with the term “homestead exemption.” However, there may be a wrinkle you are unfamiliar with.

When you turn age 65, you can fill out an application with your appraisal district to qualify for the over-65 homestead exemption. This is an additional $10,000 homestead exemption from school district taxes (on top of the $40,000 exemption from school district taxes for all homeowners).

The year you qualify for the over-65 homestead exemption is called the “freeze year.” The freeze year is an important concept because it establishes your “tax ceiling.” The benefit of the tax ceiling is that it caps your future school district taxes to the amount you pay in the year you qualified for the over-65 homestead exemption. This means your school district taxes may not go above the tax ceiling amount, unless you make changes to your home that your appraisal district deems to be an improvement (e.g., adding a new room or second story).

We have been asked, what happens to my tax ceiling if I move; do my property tax values reset? The good news is you can take your tax ceiling ratio with you. For example, if your home is appraised at $1,200,000 today but was valued ten years ago at $600,000 when your school district taxes were frozen at age 65, you currently have a tax ceiling ratio of 50%. If you decide to move to a new home in the same or other district, you can apply your 50% tax ceiling ratio to your new home. Your school district taxes will be 50% less than what they would be without the tax ceiling ratio applied.

The bottom line: If you are age 65 or older and are moving within Texas, make sure you take your tax ceiling ratio with you. It is a simple process. You or your title company requests a Tax Ceiling Certificate from your former appraisal district and then file it with your new appraisal district when you apply for a residence homestead on your new home.

A Look at Schwab’s Advanced Beneficiary Designations

When it comes to asset transfers at death, beneficiary designations are just as important as a will, particularly when the beneficiary account (such as an IRA) is the largest single asset in the estate.

Because of the new shortened 10 year distribution period for Inherited IRAs, more people are forgoing naming trusts as beneficiaries and listing children directly.

Many clients may be surprised to know that Schwab’s “default” beneficiary designation simply divides the assets among the surviving beneficiaries – with no consideration to their lineal descendants. For example, if there are three named beneficiaries and one dies, the account is divided among the two surviving beneficiaries. Under this standard “default” designation, nothing would pass to the children of a deceased beneficiary. See Illustration 1 below for two examples of the standard designation where 1 of 3 and 2 of 3 named beneficiaries are deceased.

An often overlooked and misunderstood beneficiary option is a “per stirpes” or “per capita” election. These elections include the lineal descendants of a named beneficiary in the event that beneficiary predeceases the account holder. It is like having a built in contingent beneficiary without specifically naming all the heirs.

With a per stirpes election, the lineal descendants of a deceased beneficiary split the portion that the deceased beneficiary stood to receive. See Illustration 2 below for two examples of per stirpes where 1 of 3 and 2 of 3 named beneficiaries are deceased.

Schwab’s per capita election is the same as per stirpes if any named beneficiary survives. The difference is how descendants are treated if ALL the named beneficiaries pass away. With per capita, all the descendants are treated equally. See Illustration 3 for an indication of the difference between the standard, per stirpes and per capita elections in the event there are NO surviving beneficiaries.

The easiest and preferred way to view and update your beneficiaries is online via the Schwab website under Service/Beneficiary. They can also be changed using a Schwab beneficiary update form.

Keep in mind, this applies specifically to Schwab, other custodians can have a different approach for their beneficiary designations.

Please reach out to your Wealth Advisor to review and ensure these designations align with your ultimate wishes.

Funding your Revocable Living Trust with Real Property

Tanglewood has long espoused the benefits of Revocable Living Trusts (RLT). An RLT allows you to transfer ownership of your assets into it while maintaining control over those assets during your lifetime.

Benefits of an RLT include:

  • Avoids probate

  • Flexibility and control

  • Privacy

  • Continuity of management

This article focuses specifically on the importance of including all real property (including your home) into an RLT.

Unlike a will that requires involvement from the probate courts, an RLT allows a successor trustee to immediately step in to make management decisions on the property without delay.

If you have an RLT, fund it

Many people who have a living trust never retitle their real property into it. If this is you, keep in mind the executor of your will cannot transfer property from your estate to your RLT until after the probate court names them as executor, something you wanted to avoid in the first place.

This is especially important for clients who own property in more than one state as probate in certain states (e.g. California) are more cumbersome than in others. Retitling out of state real property into an RLT will not only avoid the time and expense of ancillary probate, but it allows for continuous management of these assets.

Putting your residence and other assets into an RLT today saves time and resources later. As many people age, they risk potential incapacity and/or dementia; making it much more difficult to retitle assets.

Contact your insurance agent

Finally, after you retitle your real property into an RLT, contact your insurance agent to discuss adding the trust as an “additional named insured” on both your homeowner’s and umbrella policies. If a home is damaged by fire or flood, the individual persons have an insurable interest in the home contents, but the living trust technically has an insurable interest in the structure. If the trust is not also added to the policy, it is possible the insurance company will pay the claim on the contents, but not on the structure.

Disclosures

Titling Joint Assets – An Integral Part of an Estate Plan

How property is titled is a crucial part of any well-designed estate plan. The lack of coordination between asset ownership and estate planning documents can inadvertently lead to unwanted consequences.

Many of our clients own joint accounts that are either titled as Tenants in Common (TENCOM) or Joint Tenants With Rights of Survivorship (JTWROS). The difference can significantly affect the asset distribution outcome.

Tenants in Common

Assets that pass through a will are referred to as probate assets. A typical example is a TENCOM account. It is owned by multiple individuals who each have a separate, but undivided interest. At death, the decedent’s share must go through probate and follows the will’s instructions.

Joint Tenants with Rights of Survivorship

In a JTWROS account, each owner has an undivided interest and survivorship rights. This means a decedent’s share passes to the surviving owner(s) by “Operation of Law”, therefore – bypassing probate – and independent of the will’s instructions. For spouses, a JTWROS account can be an efficient way to pass assets to each other at the first death in the right circumstances, such as spouses who have no children or simple wills leaving assets outright to each other.

Effect on the Estate Plan

Oftentimes, one or both spouses want to ensure that their children (or children from a previous marriage) inherit assets. Their estate plan may incorporate the creation of a trust that provides income and/or principal to their surviving spouse and children. A TENCOM accomplishes this since the deceased spouse’s half of the account flows through the estate to fund the trust. The other half is distributed outright to the surviving spouse.

However, a JTWROS account may completely negate a planning strategy that called for the creation of trusts. Unless there are other funds earmarked. The JTWROS assets will transfer outright to the surviving spouse and not be available to fund the trust.

Avoiding probate at death is a goal that more people are incorporating in their estate plans. Accounts that transfer assets directly to their intended heirs can accomplish this. Should this be your goal, make sure a separate account is set aside which can be easily accessed by your executor. This is to provide funds for final bills, funeral expenses, costs, and taxes related to settling the estate.