Sean Robertson and Gateville Law Firm concentrate in real estate and estate planning law. Today’s blog article is about whether it is wise to gift property to adult children prior to a parent’s death or should the adult child inherit the investment real estate property upon the parent’s death? This article addresses investment real estate property in the State of Illinois. Earlier this week, I received a phone call from an adult child that has a parent that is dying. Unfortunately, this is a pretty common phone call. The parent has three (3) investment properties.
Investment Real Estate and Death
A parent’s impending death is a significant issue in a person’s life. Unfortunately, financial and legal decisions must be made. Often, a parent has cancer or another illness where their death is foreseeable. Unfortunately, parents and adult children do not think about these tax related issues. Seeking out a qualified real estate and estate planning attorney is a wise decision to anticipate legal and financial issues that may arise.
Will, Trust, and Powers of Attorneys
One of the first steps for a parent that has a major illness is creation of a Will, Trust, and Powers of Attorneys. These estate planning instruments work together to create a smooth process upon one’s death. In this week’s phone call, the adult child had five (5) brothers and sisters and one brother is estranged. With an estranged family member, a last will and testament is not a good choice unless it is a pour over will (versus a last will and testament).
Pour Over Will
A Pour Over Will is a will that combines with a Living Trust or otherwise known as a Declaration of Trust or Revocable Living Trust. A Pour Over Will is only used if one does not fully fund their Trust as they should do. Hence, the Pour Over Will in most cases will not be used and a probate proceeding is unnecessary. In contrasts, a Last Will and Testament is intended to be the major estate planning instrument to transfer one’s wealth upon a death. A Last Will and Testament must go through probate court. With an estranged family member, a probate court proceeding should be strictly avoided because of a prolonged estate conflict. A prolonged estate conflict costs thousands of dollars in legal fees and costs. One way to avoid a probate proceeding is to use a Living Trust to transfer one’s property to their family members. Unlike a probate proceeding, there is no requirement that the estranged family member be mailed anything.
Inherited Investment Real Estate
After a Living Trust has been created, the next step is to properly fund the Living Trust. Properly funding the Living Trust involves either creating a Quit Claim Deed in Trust for the property transfer or gifting the property to a family member (or members) prior to one’s death. With investment real estate, one must consider the tax consequences of a gift transfer.
Generally, a person must pay a capital gains tax upon the sale of investment real estate. A person will pay a tax based upon their appreciation in value in the property. For example, a person that buys a building for $100,000 and can prove $20,000 in improvements to the property will have a cost basis of $120,000. Basis is the term used to determine what a person’s capital gains tax will be. Basis means a person’s investment or costs in a property. Capital gains tax applies to investment property for a person’s appreciation in a property. For instance, a property sells for $300,000 and the person above has a basis of $120,000. The amount of capital gains taxable transaction is $180,000 in this example. Thus, if the ill family member transfers the property during their lifetime via a quit claim deed, then the inherited property will have a significant tax consequence when the inherited property is sold. The current capital gains under the new 2018 tax law are 0 percent, 15 percent, and 20 percent depending on one’s income.
On the other hand, if the elderly person transfers their property interest upon their death to their family member, then the property has a “step-up in basis”. A step up in basis means that the property will have a new basis of the fair market value of the property at the time of death. Thus, the inherited investment property exception is a critical exception for investment real estate. This step up in basis may result in a significant savings in real estate taxes. Most inherited property is sold within a reasonable time after one’s death. Thus, the tax, real estate, and estate planning advice of a qualified professional is critical.
Skilled and Experienced Real Estate Attorney Serving Yorkville, Naperville, and Shorewood
Sean Robertson is a tax, real estate, and estate planning lawyer with offices in Naperville, Yorkville, and Shorewood. Unlike most real estate lawyers, Sean Robertson has significant tax, business, and estate planning expertise. This expertise results in significant savings to a person and their family members. Attorney Robertson may be reached at 630-780-1034.
Gateville Law Firm regularly services people in the Plainfield, Aurora, Oswego, Yorkville, Plano, Shorewood, Joliet, Crest Hill, Minooka, Naperville, Montgomery, and Lockport areas.