Estate planning often involves strategies to make things easier for heirs. Parents might list their children on accounts as a way of avoiding probate. Another probate-avoidance plan could entail transferring the ownership of a house to adult children rather than leaving the property to them in a will. Gifting an Illinois home might come with some unforeseen troubles, though.
The “step-up in tax basis” concern
Homeowners who are estate planning might focus on probate exclusively and overlook questions and costs associated with capital gains. Upon gifting a home to adult children, the “step-up in tax basis” IRS rules could come into effect. The step-up rule refers to capital gains taxes on the appreciation of the property. When inheriting a house, the step-up rule doesn’t apply.
The taxes on the capital gains could be more than the costs associated with probate. Perhaps setting up a living trust could help beneficiaries acquire the house while avoiding probate and other time- and money-consuming issues.
Even if the adult children don’t worry about high tax bills, parents need to be aware of other troubles that arise when gifting a home. When a homeowner gives away all ownership in a property, the house belongs to someone else. Several problems could then occur.
Living in someone else’s home
The adult children may intend to allow the parents to remain in the home, but troubles could arise. What happens if a child runs up massive debts, borrows money on the home, faces lawsuits or files for bankruptcy? All those financial issues could impact the property. Among other problems, the property could end up with burdensome liens on it.
Parents might assume that gifting the house allows them to seek Medicaid or avoid losing a residence to a nursing home’s high bills. Things might not work out as expected, and preventing financial responsibilities may be impossible.
Illinois residents could make estate planning decisions without conferring with an attorney, but that could lead to potential troubles. An attorney can explain tax implications and probate-avoidance strategies. The attorney could also draw up legally sound documents such as a will or trust.