Considerations of transfers of property by deed
June 2, 2022
Sometimes clients inquire about adding their children’s names to the deeds on their homes – thinking this plan would avoid probate or perhaps in an effort to protect the home from claims, even if the home is protected homestead. Generally speaking this may not be a good idea.
One reason is that, upon death, your assets receive what is called a “step up” in basis – basis is a tax term which describes the amount of income received when an asset is sold, i.e., the original purchase price. During your lifetime if you sell property, you pay taxes based on the asset’s gain in value, and any appreciation above your basis, or original purchase price, would result in taxable income.
At your death, your assets are revalued. They are not valued at their original purchase price, or basis, but instead, your assets receive a new basis. This new valuation, or basis, is based on its value as of your date of death. This is the “step up” in basis. It allows your heirs to sell your property without paying taxes on the appreciation or gain during the decedent’s life – in other words, your heirs inherit the property with your date of death value and therefore have an appreciated or gained amount in the assets which is tax free.
Gifted property, on the other hand, does not receive that step up in basis on death; rather the gifted property has the original value or basis, so the gain in the assets value may be taxed later upon its sale.
One planning tool that may be considered is the use of a lady bird deed, allowing the home to remain in your name during your lifetime, keeping you in control over the property, until your death, wherein it passes automatically to the heirs without going through probate.
Of course, everyone’s estate plan and situation is not identical. There may be drawbacks, especially if there is a minor child involved. If there is a minor, there may well be a need to establish a guardianship for that minor to manage the property until the minor reaches the age of majority. Another consideration may be to establish a trust which names the minor as a beneficiary. If there are multiple beneficiaries involved, perhaps establishing a trust as the beneficiary of the lady bird deed may be an option.