Picture the following: you and your spouse decided that you would like to leave your home to your son. Your neighbor suggested the best way to do so was to add your son to the deed, so the child will be on the title when you pass away. You have the home retitled.
The issues with the above scenario begin almost immediately. You and your spouse can no longer sell the property without your son’s consent. Suppose in the future he has a difficult significant other who pressures him to make sure the house is never sold – if they win him over, your hands are tied. You would also need to report the transfer to the IRS as a gift and file a Gift Tax return.
When you and your spouse pass away, the property is not the only thing your son will inherit. Whenever he decides to sell the home, he will be required to pay capital gains tax on the appreciation from the time you purchased your home, due to your old and often very low basis.
What does that mean? Say you purchased your home in the early nineties for around $150,000. Now, 30 years later, the property is worth somewhere between $400,000-$500,000. Your son will be eager to immediately sell the house and cash in on that equity you built for him. However, he will have to pay capital gains tax on the difference between the original purchase price and today’s value. This can amount to tens or hundreds of thousands of dollars in tax liability.
What could you have done differently? With a proper Estate Plan, you would have placed the property into a Revocable Living Trust which leaves the property to your son when you pass away. The Trust requires no gift tax return preparation at the time of transfer, allows you to remain in control of the house while you are living, and your son gets a step-up in basis to the date of your death under the current tax law. Going back to our example, when he sells the house there would be little to no capital gains tax on the sale of the property.
Give your family a gift, and a huge favor by properly setting up your Estate Planning documents with an attorney who concentrates on Wills and Trusts exclusively.
Please call us at 301-696-0567 or self-schedule at lenaclarklegal.com if you would like help protecting your assets and loved ones in the event of death or disability.
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