Several people in the last few days have asked me whether they should donate a piece of property to their child, or whether they should let the child inherit the property from the parent.
There are several factors to consider when determining whether to donate property, or to leave to a child or other heir through your Will or Trust. Here's a few of the factors:
(1) Capital Gains Tax. If you purchased a piece of property for $50,000, and it is now worth $200,000, and you donate the property during your lifetime, the donee (the person you give the property to) will receive a "carry-over" basis. When the donee sells the property, they will pay capital gains tax on what they receive in excess of $50,000. If, however, the child inherits the property from you through your Will or Trust, the inheritor will enjoy the benefits of the "stepped-up" basis. The inheritor's basis will be the value of the property on the date of death. For this reason, many elect to hold on to their appreciated property and let the child(ren) inherit it.
(2) "I Don't Want Them To Sell It. Some people own family property and they do not want it sold after it has been transferred either through gift or inheritance. Perhaps that may be a factor that would warrant you keeping the property for your lifetime, and then allowing the inheritor to own it when you die - perhaps when they are more mature and more likely to abide by your wishes to keep the property in the family.
(3) The Property Generates Income. If the property generates timber or rental or mineral income, this may be a factor as to whether your keep it or donate it. Perhaps you want to continue to receive the income because you want it or need the income, or perhaps your child who may be in a lower income tax bracket may pay less tax if they receive the income.
(4) "I Just Him To Have It." Some people simple want their child or children to own the property - now. If that is really what you want - for whatever reason - then give it to them. Just make sure it is an informed decision in light of all of the other factors that come into play.
(5) Estate and Gift Tax. Because individuals have a $5.49 million gift and estate tax exemption that they can use by making gifts during their lifetime or by leaving assets to others when they die, the estate and gift tax should not be afactor for most people who are contemplating making gifts of property. If a gift is made that is larger than the annual exclusion amount (currently $14,000), no tax is due - the Donor simply used up some of their $5.49 million estate tax exemption.
(6) Future Medicaid Eligibility. If there is a concern that the parent may need the Louisiana Long Term Care Medicaid benefit if they go into a nursing home in the future, this may be a factor that warrants making the donation now. If the parent holds onto the property and needs nursing home care in the future, the parent would not qualify for Medicaid until after he or she sold the property and used all of the proceeds of the sale on long term care nursing home expenses.
As you can see, several factors go into whether you should keep property or donate it before you pass away. Make sure your decision is fully informed - a mistake could cost your family plenty. For more help, call us at 866-491-3884.