Transferring property prior to death could be an unnecessary expense for the would-be heir.
Generally, when property is passed through the direction of a will or even a Trust, the heir will receive what is called a stepped-up cost basis. That means fair market value of the property is established at the time of death, and that now becomes the cost basis for the heir. If the property is sold for that fair market value, there would be no gain and no capital gains tax due.
If the property is gifted prior to the death of the donor, the cost basis is not stepped up to current market value.
So, in addition to receiving title to the property as a gift, now when that heir goes to sell the property they will also receive a tax bill for the capital gain based on the original cost basis of the property. The transfer of title as a gift to the heir does not trigger a tax event; but instead when the property is sold. The gain is calculated by subtracting the cost basis from the sales price leaving the difference subject to capital gain tax. In other words, the person receiving the gift does not get the stepped-up cost basis they would otherwise enjoy if the transfer had occurred at time of death through a Trust or Will.
There can be advantages to transferring property prior to death
It completes the transfer without having to wait for the death and therefore bypasses the probate process that might be required. By removing the property from the owners name it could lower the taxable estate which could be another advantage to the donor.
Some owners may need to transfer title prior to death to qualify for Medicaid. The value of the asset might make them ineligible or trigger a Medicaid Transfer Penalty if the gift is made within five years and the basis of the property is less than fair market value.
Transferring property prior to death can have disadvantages for the Donor
Once a property is deeded to someone, the donor loses control of the asset and it cannot be reversed. Depending on the value of the estate, there could be gift or estate tax implications, or trigger capital gain tax consequences for the donor when they dispose of the property.
If the person receiving the gift has creditors or judgements, the gift becomes an asset subject to those creditors or judgements.
Even though the mechanics of transferring title to a property is simple
There are many things to consider for both the person giving the property and the one receiving it. Consult an attorney and tax professional to help you decide the best decision for your situation. There could be other alternatives that better serve your situation.
One of the services we provide our clients who own property here in the Desert is a current market value analysis that can be used in the situation of the death of a spouse or partner. We can help you establish current market value for the purpose of stepped up cost basis for the heir. If you would like more information, give us a call we’re happy to help.