What if parents at retirement age, insist on transferring their assets under their children’s name to avoid estate taxes when they pass away? If they have a primary home, an investment property, and savings accounts that total south of $1 million, are there really any tax advantages to making the changes?
nj.com’s recent article, “This estate planning mistake could mean huge tax bill,” cautions against these drastic moves. These transfers have serious tax consequences, and most of them are not good.
Seniors frequently transfer assets to their children to be eligible for Medicaid/Medical, avoid probate, and eliminate estate and inheritance taxes.
There could be significant harm in making the transfers now rather than waiting for the parents’ deaths. The tax basis of any asset held until death, is stepped-up (or down if the value has decreased) to fair market value. Therefore, if the parents owned the property for many years, paid significantly less than it is worth today, and the building has been completely depreciated, then their tax basis is probably significantly lower than the fair market value. However, if it were sold today, there would be a significant capital gains tax to be paid. That’s the difference between the sales proceeds received and the owners’ tax basis.
If parents gift the property to the children during their lifetimes, then the kids take the property with a carry-over basis—they’d have the same basis the parents had and would have the same capital gains tax due when sold. However, if the parents hold on to the investment property until their deaths, the children inherit the property with a stepped-up basis. The children could sell the property the next day and completely avoid any capital gains tax. Another option is to hold on to the property after the parents' death and begin to depreciate the building again to decrease any taxes the kids would pay on any rental income. It works the same way for the parents’ primary residence.
Also, the assets are the parents and they may need them to live on. Giving away assets also means giving away control.
Don’t allow parents to make these kinds of decisions, without speaking to an experienced estate planning attorney in your state. They will know the long and short-term tax consequences and help the family plan properly.
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: nj.com (April 10, 2018) “This estate planning mistake could mean huge tax bill”