Should My Parents Give Me Title to All of Their Property Before They Die?
Estate lawyers and financial planners are often asked whether it is a good idea to transfer all of your property, especially real property, to children or relatives before you pass away.
This is not always a good idea.
Unfortunately, the IRS and the state of New Jersey (and most other states) are not so lax as to let transfers of incredibly valuable assets happen without their long reach tapping on your shoulder and asking for their cut.
There are legitimate estate planning reasons to transfer assets to children, whether for avoiding estate/inheritance tax or probate or for Medicaid qualification. However, those options should only be used with the advice of a qualified estate planning attorney who can walk you through the consequences of those transfers and come up with a strategy.
In New Jersey, there has been an estate tax on valuable estates in the past, but in 2017 it was increased from $675,000 to $2 million, and in 2018 the New Jersey estate tax was repealed entirely. An estate tax is a tax imposed simply because a person has passed away with a large amount of money.
There has also been an inheritance tax in New Jersey for many decades, and that tax is still in effect. The good news is that if you are a close relative (spouse, child, grandchild, or parent) to the deceased, it will not be applied to you. Otherwise, there are numerous factors as to what amount will be required.
Most individuals will not have to worry about federal estate taxes, because single filers are exempt from federal estate tax until their estate exceeds $11.8 million, or twice that ($22.36 million) for joint filers combined.
Passing property before death also misses out on a significant advantage: a stepped-up basis. If an individual holds an asset until death, the asset’s cost basis will be “stepped-up” to fair market value. This minimizes capital gains tax for heirs.
Consider this example. John bought a house in 1982 for $80,000. The house is now worth $350,000 fair market value. If John gifted the house to his son Frank during John’s life, the cost-basis for the house would carry over from John to Frank, at $80,000. If John sold the house during his life or Frank sold the house after receiving it from John, the seller would be on the hook for capital gains tax based on the difference of $350k and $80k.
If John waited to pass the house to Frank in his will instead, Frank could sell the house the day after receiving it without paying any capital gains tax: his cost-basis in the house would be set at the fair market value when John passed.
An estate planning attorney can point out these consequences to you and help you realize your goals in planning for your estate and retirement. Give our office a call today at 609-580-1044 to schedule a consultation.
Reference: nj.com (April 10, 2018) “This estate planning mistake could mean huge tax bill”