by Justin M. Kennedy, Attorney at Law
Litherland, Kennedy & Associates, APC, Attorneys at Law
Recently I met with a client, Tammy, who wanted to immediately gift her home to her son, Eugene. Even though Tammy already had a comprehensive estate plan with our office that included a Living Trust, Tammy had talked with her friends who suggested gifting the home now was in her best interests. When I asked more questions, Tammy shared that one of her friends, Mike, had died without a Living Trust and Mike’s children had to take the family home through the expensive and time-consuming court process known as the death probate. Tammy’s friends then shared that if Mike had gifted the house to his children in advance, the house would have avoided the death probate.
Once I understood that Tammy was motivated to protect Eugene from the costs of the death probate, I was able to explain that titling her home in the Living Trust would already allow the home to pass free of the death probate.
Tammy then shifted the conversation to whether there are advantages or disadvantages to gifting the home to Eugene now while Tammy is alive.
Advantage of gifting the home to Eugene now
- Eugene would be an immediate owner of the home.
- This could allow Eugene to use the home as collateral for a loan or to help him qualify for a preferential loan rate by having more available assets.
- Eugene could also take tax deductions on the property taxes he pays on behalf of the home, (this tax deduction may be less important under our new federal tax laws).
- The home would pass to Eugene free of the death probate.
Disadvantages of gifting the home to Eugene now
- As an immediate owner of the home, if Eugene was sued, or if he got divorced, or if he had to file for bankruptcy, he could lose Tammy’s home.
- Maybe Tammy would not want Eugene to be able to use the home for collateral on a loan so long as Tammy is alive, but if the home belongs to Eugene, he can use it however he wants.
- Tammy would need to file a Gift Tax Return on the value of the home.
- If Eugene needed to sell the home, he would need to pay capital gains taxes on all of the appreciation since Tammy first purchased the property (the appreciation above her basis in the property).
- If Eugene then died while owning the home, then the home would need to go through the death probate process. To avoid this, Eugene would need to create his own Living Trust to hold the home.
Advantage of allowing Eugene to Inherit the home upon Tammy’s death
- Eugene can receive the inheritance in an asset protect trust (set up under Tammy’s Living Trust). This asset protect trust protects Eugene’s inheritance from lawsuits, divorce, and bankruptcy.
- Eugene may or may not be the Trustee of his inheritance depending upon Tammy’s preferences. If Eugene was financially immature, it might be a very good idea for Tammy to assign someone else to manage Eugene’s inheritance for him.
- Eugene would not be an owner during Tammy’s life, meaning he could not cause Tammy to lose her home.
- Upon Tammy’s death, the home will receive a step-up in cost basis. The basis in the property will become the fair market value as of Tammy’s date of death. This means that if Eugene needed to sell the property right after Tammy’s death, there would be no capital gains taxes.
- With the home in Tammy’s Living Trust, the home passes free of the death probate.
- The home will pass free of probate upon Eugene’s death, because our office helped Tammy build contingency provisions into her Living Trust.
Disadvantage of allowing Eugene to Inherit the home upon Tammy’s death
- Eugene is not an immediate owner of the property during Tammy’s life.
- Eugene could not use Tammy’s home as collateral for a loan for him until after Tammy’s death.
After this discussion, Tammy decided to leave her home in her Living Trust. Eugene would inherit the home upon Tammy’s death, and he would receive all of the preferential tax treatment and Living Trust protections discussed above. If you would like to learn more about a Living Trust and the protections under a Living Trust, please attend one of our upcoming Living Trust Seminars. If you are already a client of our office and want to learn how to take your Living Trust to the next level of protection, please attend one of our upcoming Client Review Workshops.