Avoiding Probate

[libraryfreak]

I know someone who, in order to "avoid probate tax," transferred her house to her daughter free and clear. I was under the impression that when the daughter sells the house she would have to claim the whole sale price as income and pay capital gains tax on it, whereas if she had let it go through probate she would of been able to use the market value of the house at the time of the mothers death as a basis & only had to claim the appreciation cost on her taxes. But maybe the tax laws have changed? Does anybody have any experience with this? TTIA.

 

[michellejed]

The house would not be included in the Porbate if it was in a living Trust.

You start a Trust and the house becomes the property of the Trust with the parent and child as trustees, after the death of the parent then the house remains in the trust with just the child as trustee.

That is the simple way of putting it, you will need an attorney to help do this at a cost of about $600.

 

[Swimalie]

I know someone who, in order to "avoid probate tax," transferred her house to her daughter free and clear. I was under the impression that when the daughter sells the house she would have to claim the whole sale price as income and pay capital gains tax on it, whereas if she had let it go through probate she would of been able to use the market value of the house at the time of the mothers death as a basis & only had to claim the appreciation cost on her taxes. But maybe the tax laws have changed? Does anybody have any experience with this? TTIA.

She will also have to claim the gains from the time she took ownership until the day she sells it. If she waited until after death then the taxes would be a lot lower. Is she living in the house? If she lives in it, then she's okay. If she's not living in it, then she will have to pay the capital gains tax.

We had a similar deal come up when my mother in law tried to give us partial ownership to stock she owned. We didn't want it since then we'd have to pay capital gains from the day we took partial ownership instead of taking full ownership upon her death.

 

[Cheshire Figment]

Under Federal tax code there are two methods to give property, such as your house, as a gift to anyone.

Method one is transfer upon death. This may be done by several methods. The key to this is the recipient gets the Fair Market Value at time of death as the basis for gain or loss.

Method two is a gift while still alive. In this cas the value to the recipient is the lower of cost or market.

So when the recipient sells the property, under method one the gain (if any) is computed based on their cost being the FMV at the date of the prior owner's death. Under method two the gain is based on the cost to the original owner; this means the taxable gain is much higher if given as a gift while the donor is still alive.

Under current law an Estate of under $3,500,000 does not have any Estate Tax to pay. State and local laws may have an effect, but not as much as the potential gain under Federal Tax Law.

Mike (CPA Retired)

 

[Tampa Mousekeeter]

I know someone who, in order to "avoid probate tax," transferred her house to her daughter free and clear. I was under the impression that when the daughter sells the house she would have to claim the whole sale price as income and pay capital gains tax on it, whereas if she had let it go through probate she would of been able to use the market value of the house at the time of the mothers death as a basis & only had to claim the appreciation cost on her taxes. But maybe the tax laws have changed? Does anybody have any experience with this? TTIA.

Depending on what state they live in that wasn't the smartest move, unless her entire estate is valued over $675K a Class A beneficiary would not be paying inheritance tax...but like I said all states are different.

 

[czycropper]

I have to agree with previous posters...not the correct move! She would be a Class A beneficiary. Her Mom made the wrong move, she should have set up a Trust and put the house in the trust with her daughter as Trustee. Florida does have some real weird Estate Laws though and Probate is a big nightmare - we deal with clients that have houses in both Florida and NJ and we always try to get the whole Estate to go through NJ.

Also, please note that the Federal Estate exemptions are in limbo for 2010 since Congress has not passed the bill yet....so we are all hoping that it will be set at $3.5 million as it has been for the past few years BUT you never know! Again each state has a different amount for estate exemption.

I work for a tax and estate attorney and I do all the estate administration so I deal with this ALL the time.

 

[eliza61]

I know someone who, in order to "avoid probate tax," transferred her house to her daughter free and clear. I was under the impression that when the daughter sells the house she would have to claim the whole sale price as income and pay capital gains tax on it, whereas if she had let it go through probate she would of been able to use the market value of the house at the time of the mothers death as a basis & only had to claim the appreciation cost on her taxes. But maybe the tax laws have changed? Does anybody have any experience with this? TTIA.

My dad just passed this May, we did go through probate but since the estate was under 1 million bucks there were no federal or state (NY) estate taxes.

Currently my youngest brother who resided with my dad is still living there and the will name all 3 of us as beneficeries (sp?). We have 1 year to probate and get the correct deed filed.

 

[Sadie22]

I know someone who, in order to "avoid probate tax," transferred her house to her daughter free and clear. I was under the impression that when the daughter sells the house she would have to claim the whole sale price as income and pay capital gains tax on it, whereas if she had let it go through probate she would of been able to use the market value of the house at the time of the mothers death as a basis & only had to claim the appreciation cost on her taxes. But maybe the tax laws have changed? Does anybody have any experience with this? TTIA.

If this was not done for other reasons under the advice of an attorney, it is possible to reverse the transaction. The mother and daughter should consult an estate planning or elder care attorney and go over her planning so that she understands all alternatives and can accomplish her goals in the most cost-effective manner for all concerned. Tax planning for the child is not the only possible reason for an older person to hold onto a home. Often people read a magazine or newspaper article and act without knowing alternatives or the reasoning to do or not do. An experienced attorney can discuss alternatives. It is possible that the parent had other reasons for the gift as part of her overall estate planning which you are not privy to.

 

[swilshire]

I really want to set up a trust (or may need two trusts) but I've been putting it off. For one thing, my daughter is in law school and even though this won't be her field, I hoped she be able to steer me in the right direction after she starts working in the industry.

I need a trust to hold low value pieces of property I own in other states just to avoid probate. For the last one I bought, I included my daughter on the deed, but I still have property in two states beside the one I reside in. I don't want the family to have to go through probate in three states.

I also need a special needs trust for my handicapped son.

It just seems like a lot to figure out. The only estate planner I ever consulted gave me very bad advice relating to my Mother's estate and I just read in the paper that he's under indictment for embezzlement. It's hard to know who to trust.

Sheila

 

[libraryfreak]

Thanks all for your help, unfortunately the mother died a couple of months ago and they transferred the house before her death. I tried to tell the daughter about the tax consequences before her death, but she didn't believe me and said the laws had changed and she wouldn't have to pay the tax. She's getting ready to sell and I 'm afraid she'll be in for a shock. I don't really want to say anything more to her, but I hope she puts aside money from the sale of the house for the tax liability.

Will she know at closing about the tax, or will she get a 1099MISC or some other form in January?

And why do people do these things to try to avoid probate? I probated my parents estates (without a lawyer I might add) and we didn't pay any large tax bills, if any at all. When they died your estate had to be over something like $650,000 to begin thinking of taxes, and believe me it was nowhere close.

I should add - I saved 4% of my parents worth by probating their wills myself and not hiring a lawyer. It took some time, but people in the courthouse were helpful. When my mom died everything went to my dad and when he died it was split evenly with myself and my siblings. So I didn't have a complicated will to deal with. And my siblings were very easy to deal with. I would recommend it to anyone who has some time and patience, it can save alot of money. If you get stuck, you can always hire a lawyer at that point.

 

[swilshire]

I probated my parents estates (without a lawyer I might add).

In the county where I live, they make it almost impossible to close an estate without an attorney. They went so far as to tell me I couldn't do it when my Mom died, but I fought them and eventually prevailed. She had a very small estate and I was the only heir.

Sheila

 

[libraryfreak]

I probated my parents estates (without a lawyer I might add).

In the county where I live, they make it almost impossible to close an estate without an attorney. They went so far as to tell me I couldn't do it when my Mom died, but I fought them and eventually prevailed. She had a very small estate and I was the only heir.

Sheila

I think lawyers do that deliberately so you have to hire one.

Good for you for sticking it out! My parents too had a small estate and it really irked me to go to a lawyer to have my mom's estate go to my dad. So I did it myself. Then when he died I figured I'd try it again.

 

[Friendly Frog]

This has be to thinking, my mom put me on the title of her home, thinking that when she died I would not have to do anything or include the house in probate. I wonder if this is true? (She doesn't really own much except this small home.) Should I somehow get this house out of my name, like with a quick claim deed or something?

 

[Cheshire Figment]

This has be to thinking, my mom put me on the title of her home, thinking that when she died I would not have to do anything or include the house in probate. I wonder if this is true? (She doesn't really own much except this small home.) Should I somehow get this house out of my name, like with a quick claim deed or something?

From a tax standpoint, it is a terrible action for parents to gift ownership of the house to a child while the parent is still alive. I would suggest check with a local real estate attorney to do what it takes to get you off the title and it be changed so that when your mother dies title will then automatically transfer to you.

Mike (CPA Retired)

 

[Sadie22]

From a tax standpoint, it is a terrible action for parents to gift ownership of the house to a child while the parent is still alive. I would suggest check with a local real estate attorney to do what it takes to get you off the title and it be changed so that when your mother dies title will then automatically transfer to you.

Mike (CPA Retired)

Sometimes elder law planning is done where it makes sense to gift real estate to a child from the parent's planning perspective. An elder law or estate planning attorney would be able to go through all the alternatives and reasons for each, including tax ramifications.