What is the five and five exception?

If you are at all interested in the world of Texas estate planning either for yourself or for a loved one then we would recommend frequenting the YouTube page for the Law Office of Bryan Fagan’s estate planning division. There, our experienced and knowledgeable estate planning attorney, Megone Trewick, talks to an audience every day about our law practice and how we assist our neighbors and community members in planning their estates and troubleshooting issues before they become major problems. There is no charge to view these videos and the information that you gather from them can be used to help you walk through whatever stage you are in as far as the estate planning process is concerned.

One of the topics that may not gather much notoriety when it comes to estate planning but is nonetheless important is known as the five and five exceptions. Like many things in the world of the law, this is not necessarily a subject that you can immediately know something about just from its title. The five and five exception could mean pretty much anything. However, if you are thinking about a trust and if you’d like to create a charitable contribution to that trust or if you simply want to know more about how you can support your church or a charity then the five and five exception is something that you should learn something about because it can be of great importance and relevance to you and your estate planning goals. New paragraph

The five and five exception talks about how a charity can benefit from your estate plan if you want to give property to a charity but that property is subject to a lien or a mortgage. To get that five and five exception, you as the transfer of the property would need to have held that property for at least five years where the lien has not also been on the property. This is to avoid a situation where you wouldn’t just get the property, slap a huge lien on it, and then give it to the charity. In that situation, the charity would not be allowed to just turn around and sell it. Many times, people engage in charitable giving and things of this nature to lower the tax burden on a particular piece of property. That’s not to say that this is the only reason you would engage in charitable giving, but it certainly is a relevant factor.

The rule that the IRS came up with is if you want to give property to a charity then that property also has a lien on it you would have to hold the property for five years and that debt would have needed to have been on the property for five years. In that case, the charity would not have to pay the unrelated business income tax due to that IRS rule. We can say many things about the IRS but one thing is they are not a group of fools. They want to make sure that they get their taxes whether it’s from you or the charity. They do not care in to make sure they get their money you would not be able to gift to your charity this property in a way that avoids any kind of tax obligation. The original entity or person paying the mortgage would continue to do so even after the property has been passed to a charity by gift. That charity would not assume the debt because if that charity assumes the debt, then you fall out of the five and five exception and you will have to pay that unrelated business tax.

So long as you gift the charity the property and you meet the exception rule for the five and five and then the charity sells the property within ten years then the charity may do so and continue to operate and do the good things the charity does.

A summary of the five and five exception

The five and five exceptions relate to your desire to give property to a charity but that property has a lien on it. First, you must hold the property for at least five years after the lien is placed on it. Next, that debt would need to have been on that property for five years and if that’s the case you can give the piece of property to the charity and the charity will not have to pay the unrelated business income tax period This is since the IRS wants to make sure that they collect their tax on the property. In this situation you would pay the tax and the mortgage while the charity gets to receive the benefit of the property and can continue to do their charitable good works.

Disadvantages of living trusts

There are certain costs associated with establishing a living trust on a general level. When compared to drafting a will, it is more expensive to draft trust documents and create a trust than it is to draft a will and leave it at that. There are also short- and long-term costs of having a living trust not only costs and expenses associated with establishing the trust but also expenses that families incur later when they have to settle in a state when you or the trustor passes away. If we look at the cost of a trust from that perspective, then that would be a good point to make as far as a major disadvantage to establishing a trust.

A second disadvantage of establishing a trust is finding the property and the assets necessary to fund the trust. To do so you must retitle many of the assets that are already in your name and choose to put them in the trust. If you have a revocable living trust you should put some thought into the importance of titling assets in the name of your trust. Many people who go through all the trouble of creating a trust operate with the presumption that retitling the assets is only a small part of managing the trust overall. However, this is a major part of creating trust and should not be overlooked. If you do not return the assets are property and simply place them into the trust without first having done so then all your efforts would be for nothing. The trust would not own those assets and you would still die as their owner. This means that your family and beneficiaries would still need to go through the probate process when all is said and done.

The third disadvantage to having a living trust is that there are no tax advantages to your creating the trust. There are no tax disadvantages either, to be fair, and the decision that you make whether you will use a will and go through the probate process to transfer your assets upon your debt or to create a trust to name a successor trustee who can divide assets from the trust when you die outside the court process is not a tax decision. This is a part of estate planning that is tax-neutral. One could make an argument that there is a small advantage when it comes to taxes when you create a living trust because there are income tax circumstances that arise when a person dies, and that living trust income will be held in the trust until the property is distributed. If you have a will and you die, then that income that you that the trust generates will have the taxes dispersed to the IRS if the estate is large enough. However, for most people reading this blog post the tax consequences are minimal given that most states fall below that tax threshold for the federal estate tax period Texas has no state estate tax.

Number four on our list of disadvantages associated with creating a revocable living trust is that it is inconvenient relatively speaking. It is slightly more inconvenient to create a living trust because of the necessary title issues. You would need to title all ownership documents into the name of the trust and change them from your name. Keep in mind, however, that most of us who have established revocable living trusts look at this inconvenience as being justifiable so long as at your death your survivors are going to be able to bypass the court process, and not have to hire an attorney and then simply be able to have property distributed according to the terms of the trust outside the probate process.

Wouldn’t it be nice to be able to know how to do this? Many times, advantages like this within the estate planning community are simply skipped over because families like your own do not know that they are available. Being able to work with an experienced estate planning attorney is a key part of this conversation. By choosing to work with an estate planning attorney you can learn techniques and information that you otherwise may not have been aware of. This can be the difference between creating a functional estate plan and creating an estate plan that is not only functional but rewarding for you and your family.

One of the difficulties that people describe when it comes to revocable living trusts is that it can be difficult to refinance property that is in your living trust. Let’s look at when you set up your living trust and also own a home that still has a mortgage on it. If you plan to transfer that home into your revocable living trust then yes, you can do that, subject to the mortgage, and placing it in the trust does not accelerate the mortgage or make it due sooner. The problem comes up when you go to refinance the home loan. This may not be incredibly relevant right now given how high interest rates are but, in the future, when rates begin to recede, you may want to be able to refinance that loan.

Some lenders have different requirements set up for the refinancing of loans. It could be that the lender you chose to work with requires that the home be the name of the individual lender so that at the closing of the property you would need to take the home out of the trust and put it back into your name for the refinance. Again, this all depends upon your desire to refinance the loan and your perception of what is and what is not a major inconvenience to you. This problem boils down to more paperwork than anything else. However, you will need to judge for yourself whether this is worth the time and effort it may take.

What can you do at this very moment to prepare an estate plan for yourself?

After having read through today’s blog post you may have some questions about what you can do on a practical level right now to be able to help plan your estate. It is a good thing that you have thoughts about how you can improve the quality of your state plan and the lives of your family in the future. Ultimately, it is your family that stands to benefit by creating a functional and beneficial estate plan. However, the devil is in the details when it comes to estate planning. You may have all sorts of ideas associated with estate planning but may have little to be able to go from as far as practical knowledge.

This is a perfect situation for you to begin working with an experienced estate planning attorney. For one, speaking with someone who has designed estate plans for many different people before, is knowledgeable about the law, and is objective when it comes to getting information is a great advantage for you to have. By speaking with an experienced attorney you can learn more about what may be needed in your circumstances to improve your quality of life now and in the future.

A revocable living trust, will or any other type of estate planning device is used to perform multiple actions when it comes to your property. We have already covered how one of the goals in estate planning should be to avoid probate wherever possible. Probate serves a purpose for families and individuals but is not necessary for everyone. You should explore every possible avenue to see if you can avoid probate, you should create an estate plan that can legally allow you to pass your property outside of that process.

When you are ready to speak with one of our attorneys there are multiple ways for you to do this. If you are short on time today, then you can take a look at the estate planning YouTube page for the Law Office of Bryan Fagan. We post unique and relevant content about estate planning every day on our YouTube page. Our lead estate planning attorney Megone Trewick has a unique perspective when it comes to estate planning and she has all the experience you need to be able to come up with an estate plan that is both effective and forward painting.

Once you have watched some of our videos and are interested in speaking with one of our estate planning attorneys then you can certainly do so at your convenience. We offer free-of-charge consultations six days a week in person, over the phone and via video. The Law Office of Bryan Fagan has office locations across the Houston metropolitan area and has recently expanded our offices to San Antonio. This means that no matter where you are, what your schedule is, or what your needs are the Law Office of Bryan Fagan is here to help you. It does not matter if you’d like to meet with one of our attorneys in person or simply want to have your first interaction with our office done over the phone. We can meet you where you are in terms of your needs and help you craft a plan that will work for many years.

Thank you for choosing to spend part of your day with us here on our blog. Between our YouTube page, our blog, our website, and all the other resources that we make available to you and the public generally, the Law Office of Bryan Fagan wants you to know that we are here for you. Whether you have a question about drafting a will or creating a trust, our attorneys offer the skills and knowledge that you need to move forward with your case and plan for the future.

Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan

If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to plan your estate and learn more about the world of wills, trusts, and the probate courts.

Book an appointment with Law Office of Bryan Fagan using SetMore

Categories: Uncategorized

Share this article