stepped-up basis

Serving Southwest Florida

Helping clients plan for their family's future, by creating an efficient, thoughtful and comprehensive estate plan that preserves their legacy and gives them peace of mind.

Avoiding Probate with Homestead

This homestead estate planning issue concerns a single retired parent of an only adult daughter and how to transfer the home to the daughter. Should the daughter simply sell the house when her mother dies, or should the daughter be added to the deed now while her mother is alive?

Also, is there a court hearing?

In many states, there is no reason or requirement to go before a judge to probate your estate, says nj.com in its recent article “Should I add my daughter’s name to my home’s deed?”

In Florida estate planning, there are three primary questions to answer about the transfer of the home. First, adding the daughter to the title of the homestead property could jeopardize the property’s homestead status.  This can lead to a substantial increase in property taxes.

Second, there would possibly be some significant capital gains if the mom adds her daughter to the deed prior to death.

Also, if the mother winds up requiring Medicaid, Medicaid might put a lien against the home after she dies for the value of the services it provided.

Generally, when a home has been owned for a long time, the mother should try to preserve the step-up in basis for tax purposes that happens, if the real estate is still in the mom’s name at her passing.

Whether that step up is preserved and whether the homestead status is affected, depends on how the daughter is added to the deed.

Adding the daughter as a joint tenant or tenant in common won’t preserve the step-up basis for taxes and will negatively affect the homestead status. Ask an elder law attorney what this means in your specific situation.

A better option may be the Enhanced Life Estate Deed, where the mother transfers the property to her daughter but retains an enhanced life estate in the property.  The mother retains her authority to sell and put a mortgage on the property without the consent of the daughter.  Since there is no current transfer of the property the homestead status is not affected.  And since, the daughter receives the homestead at the mother’s death, that will preserve the step-up in basis at death.

This can also get complicated when there’s an outstanding mortgage, so speak to an experienced estate planning attorney.

Reference: nj.com (Dec. 15, 2020) “Should I add my daughter’s name to my home’s deed?”

 

Probate and Real Estate

There as unique issues when dealing with probate and real estate. For a family whose 91-year-old mother lives in her home, has a will and has appointed two sisters as attorneys in fact under her Power of Attorney and personal representatives of her estate, the question of handling the transfer of the home is explored in a recent article from the Herald Tribune, “Transfer title now or go through probate in the future?”

The family wasn’t sure if it made more sense to transfer the title to her two daughters and son while she was still living, or let the children handle the transfer as part of the estate. The brother may wish to purchase the home after the mother passes, as he lives with his mother.

If nothing is done, the house will be part of the probate estate. An estate will have to be opened, a representative will be appointed by the court (usually the personal representative of the will) and then the personal representative can sell assets in the estate, close accounts and deal with the IRS and the Social Security Administration. The probate process can be time-consuming and expensive, depending on where the mother lives.

There are a number of steps that could be taken to simplify things and make sure that probate and real estate do not become an issue. The mom’s assets can be held jointly, so they pass to the surviving owner, an enhanced life estate deed can be created, under which the the children would acquire title automatically at her death, or a trust can be created, and her assets be titled to the trust, so they pass automatically to beneficiaries.

The issue of the house becomes a little more complicated because there are so many options. If the house has appreciated significantly over the years, keeping it in the estate will minimize taxes that have to be paid if and when it is sold.

For example, let’s say the house has increased in value by $250,000. Under current tax law, the mother can exclude up to $250,000 in profits from the sale of the home. This is the exclusion before the sale of a primary residence where the owner has lived in the home for two out of the last five years.

If she signs a quitclaim deed now to give the home to her three children, the IRS will consider this a gift to the three children. Her cost basis in the property (what she paid for the home, plus the cost of any material or structural improvements) will be transferred to the children. However, when the children go to sell the property, they won’t have that same $250,000 exclusion. The three siblings will have to pay federal income or capital gains tax on the same of the home.  The mother may also lose her Florida homestead exemption.

However, if the home remains in the mother’s estate when she passes, the siblings inherit the home at the stepped-up basis. In other words, the value of the house (for estate tax purposes) will rise to the current market value at the time of her death, and not the value when she paid for the house. If the children decide to sell the house immediately, there won’t be any profit and there won’t be any taxes.

In Florida, the children would be able to use an enhanced life estate deed that would let the property transfer automatically to heirs upon the mother’s death. The siblings then inherit the property at the stepped-up value and avoid the problems of probate and real estate.

Here’s another question to consider: how does the cost of setting up trusts and enhanced life estate deeds compare to the estimated cost of probating the estate?

This family, and others in the same situation, should speak with an estate planning attorney to evaluate their options. The siblings in this case need to clarify whether their brother wants to buy the house and if he is able to do so. The mom then needs to make a decision, while she is still able to do so, because after all, it’s still her home.

Reference: Herald-Tribune (Nov. 7, 2020) “Transfer title now or go through probate in the future?”