Should you transfer your property to your children?

In the realm of estate planning, transferring property to adult children can seem like a straightforward way to pass on assets. However, this decision carries significant tax and liability implications. Let’s explore these through the lens of a specific scenario: a property purchased for $30,000 in 1970, now valued at $300,000.

Capital Gains Tax Considerations

When a property is transferred to an adult child, the tax basis of the property in the hands of the child is the same as it was in the hands of the parent. This concept, known as 'carryover basis', has crucial implications for capital gains tax. If the child decides to sell the property, capital gains tax will be assessed on the difference between the selling price and the original purchase price (in this case, $30,000). Given the current value of $300,000, this could result in a significant tax bill.

Potential for Gift Tax

Transferring property is also subject to federal gift tax regulations. As of the current laws, any gift over $18,000 per year per recipient (2024) requires the filing of a gift tax return, and potentially, the payment of gift tax. The substantial increase in the property's value well exceeds this threshold, necessitating careful consideration and possibly the use of a portion of the lifetime gift tax exemption.

Liability Issues

Transferring property to an adult child can expose the property to potential liability risks. For instance, if the child faces legal troubles, divorce, or bankruptcy, the property might be subject to claims by creditors or ex-spouses. This risk is often overlooked but can have serious consequences for the asset’s security.

Medicaid Eligibility

For elderly parents, transferring property can affect Medicaid eligibility. Medicaid's look-back period in most states is five years, meaning that transfers made within this period can lead to penalties or delays in eligibility. This is an important consideration for parents who might need long-term care.

Possible Alternatives

Given these complexities, exploring alternatives is prudent. One option is setting up a trust, which can offer more control over the asset and potential protection from some of the liabilities mentioned. Another is retaining a life estate in the property, which allows the parent to live in the home until death, at which point the property transfers to the child, often with a stepped-up tax basis.

Conclusion

Transferring property to an adult child is not a decision to be taken lightly. It requires a comprehensive understanding of tax laws, potential liabilities, and the long-term financial implications for both the parent and child. Consultation with the attorneys at Ament Law Group today to help you successfully navigate this tricky issue.