Picture the following: you and your spouse have decided that you would like to leave your home to your son. You decided the best way to do so was to add your son to the deed, so he would be on the title when you pass away. You have the home retitled. “Please don’t make me pay capital gains tax, Mom!”
The issues with the above scenario begin almost immediately. You will have to report the transfer to the IRS as a gift, and consequently file a gift tax return for the property. Further, you and your spouse can no longer sell the property without your son’s consent. Suppose 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.
When you and your spouse pass away, your child will in fact receive the property. However, that is not the only thing that he has inherited. 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. This can amount to tens or hundreds of thousands of dollars in tax liability.
So, 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 basis.
We share this story because it is true, and required significant cost to resolve. Setting up proper Estate Planning documents to prevent circumstances such as these will save you and your loved ones from extreme burden in the future.
Please call us if you would like help protecting your assets and loved ones in the event of death or disability. We work with Estate Planning clients all over Maryland and Virginia. You can call our Client Relations Specialist at 301-696-0567 during regular business hours, schedule online at lenaclarklegal.com, or speak to one of our 24-hour representatives after hours.