June 2002

Money Matters
Answers to Your Finance & Tax Questions
By John McGill, MBA, CPA, JD

Q I hope to sell my practice in five years and take early retirement at age 55. I have been funding a retirement plan for a number of years, but feel that I should stop funding the plan and begin saving on a personal basis, since I will not be able to get to my retirement plan or IRA assets until after age 59 1/2. What do you think?

A Your intended strategy is based on a common misconception and would be a big mistake. I would recommend that you continue to maximize tax-deductible retirement plan funding in order to generate the maximum dollars available for retirement.

If you sell your practice at age 55, the retirement plan would then be terminated. After IRS approval of the plan termination, the plan assets would be distributed out to each plan participant or transferred directly to their IRA accounts in order to avoid current federal and state income taxes.

Once the funds are in the IRA account, you may withdraw them in periodic monthly payments over your life expectancy immediately (at age 55) without any penalty, if you so choose.

However, in most cases, it is best to let retirement plan and IRA funds grow continuously on a tax-deferred basis and satisfy your personal living expense needs from the proceeds of the sale of your practice and from any personal investments or other assets you may have.

Q I am in the process of doing some estate planning, and my attorney has recommended the use of a revocable living trust. He also recommended that I transfer the title to my personal residence into the trust, in order to avoid probate costs and delays. I am concerned that if I later sell my personal residence, I would not be able to take advantage of the $500,000 gain exclusion that I would enjoy if I retained personal ownership. Is this correct?

A No. Under the tax law, you are treated as the owner of any assets held within a revocable living trust. As such, any income generated on such assets transferred into the trust must be included by you on your individual income tax returns. Furthermore, as long as you have used the home as your personal residence for at least two years, you would be eligible for the $500,000 gain exclusion even if the property is titled in the name of your revocable living trust.

Q Sometime ago, I transferred title to my personal residence out of my wife’s and my joint names, and solely into my wife’s name, for estate-planning and asset-protection purposes. I recently heard that I would not be eligible for the $500,000 gain exclusion on the sale of our home unless the home was titled in both our names. Is this correct?

A No. Under the current tax law, the $500,000 gain is available to any married couple that has used the home as their personal residence for at least two years, regardless of whether the home is titled in the name of both spouses or only one spouse. s

Mr. McGill is a tax attorney with McGill and Hassan, P.A., a legal firm in Charlotte, N.C., that specializes in financial issues. He formerly worked with the Office of Chief Counsel, the legal branch of the Internal Revenue Service in Washington, D.C.