Estate Planning Alert!!!
Our politicians finally made permanent the estate tax exemption. It is $5.25 million per person this year and now is indexed for inflation so we do not have to play this game every year or two. This finally removes the moving estate planning target for most people. You can read my 2010 commentary archived here.
A 3.8% Federal Sales Tax on All Real Estate?
Not exactly!
Click here for the straight story.
Thinking of deeding the family homestead to the next generation as a quick and easy way to beat the tax man, avoid probate or save the property from nursing home bills? Think again, and read more below.
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Here is a not uncommon situation: you or your parent is getting on in years, and it’s time to begin making some plans. Often the major asset is the home. Many people in these circumstances figure that an easy way to beat the tax man and the probate hassle, perhaps even to protect against nursing home expenses, is to deed the house from the parent to a child or to the children. Some people even worry that the state will just outright take their property.
In my opinion, deeding the parent’s home to a child is generally a bad idea. Unfortunately, I am surprised at the number of lawyers who will – without so much as giving it a thought – prepare a deed to implement this misconceived plan.
First of all, while probate proceedings entail some expense and can be a little frustrating at times, they are generally not that bad and can serve a valuable purpose. In any case, the state will not seize your property; the probate court acts as an overseer or, if there are disputes, as a referee.
Secondly, forget any protection against nursing home expenses. In calculating eligibility for Medicaid, the state welfare program which pays nursing home expenses for indigent persons, there is a five year “look back” period. Any gifts or transfers during that period for less than full value will be added back into the applicant’s resources in order to determine eligibility.
One of the factors that is ignored by simply transferring the property from parent to child is the tax consideration. First of all, should the parent decide to sell the property while he or she owns it, in all likelihood he or she will enjoy the benefit of a $250,000 exemption from the capital gain on the sale of a personal residence. That means if Mom paid $30,000 for that house back in 1975, her sale for $280,000 would be tax-free. But, if she conveyed the property to Sonny and then it was determined to be necessary to sell it, Sonny would have to pay a capital gains tax on the profit of $250,000!
There could be an even greater lost tax benefit. If Mom were to die owning that house (even if she were no longer living in it), Mom’s estate and her heirs would enjoy a ‘stepped up basis.” That is, the day Mom passes away, the tax basis of the property in her estate (or in her revocable trust) is “stepped up” to the value on the date of death. If that is $280,000 as in our example, a subsequent sale for that amount would yield a “profit” for tax purposes of zero. Therefore, no tax!
There is another factor to consider though. If Mom conveys her property to Sonny, it belongs to Sonny. Mom can’t change her mind and undo the deed. What is more, the property is vulnerable to claims of Sonny’s creditors. What’s that? Sonny is financially responsible, you say? In this economy many financially responsible persons are suffering reversals. Some suffer crippling medical expenses. For still others an unexpected “creditor” lurks: the property may become ensnared in a marital dispute and taken into account in the resolution of a divorce. And some children may not turn out to be so responsible after all. It was King Lear who gave his kingdom to his ungrateful daughters and went mad wandering impoverished throughout his former realm.
It is true that the deed from parent to child will take the property out of the estate thereby avoiding probate. But first of all consider whether probate avoidance is in fact that important. There are good reasons for avoiding probate in many situations. But this same result can be achieved without the disadvantages I have discussed by placing the property in a revocable trust. Please let me know if I can be of help in exploring these issues with you and your family.