Do-It Yourself Estate Planning Problems: Transferring Real Estate

There are some tasks where the “do-it-yourself” approach makes sense. This includes tightening a leaky pipe under the sink or changing the headlight bulb on your old car.

With those tasks, it is clear right away if your skills were up to the challenge and you did it correctly. If the sink still leaks or the light is still out, then you know that your efforts failed and you may need to call in a professional.

But there are some challenges where this “safety net” does not exist, and where do-it-yourself attempts can cause serious, irreparable harm. That is certainly the case with estate planning. Crafting a plan to transfer assets and save on taxes is delicate in that the only time when it will be used is at the very moment when it cannot be changed–after a passing. In other words, there are no “do overs” with estate planning, and so it is essential to have the aid of an experienced estate planning lawyer when making decisions about these issues.

Do Not Just Transfer the Deed
One of the most common do-it-yourself estate planning mistakes involves real estate. In an attempt to streamline the transfer of assets, some New York seniors are tempted to transfer ownership in a home to an adult child. The idea is for the senior to remain living in the home indefinitely but with ownership transferred so as to simplify probate upon senior’s death.

This idea may sound logical, but there are many potential adverse ramifications of this do-it-yourself strategy that may trip up residents. Most notably, the tax consequences of such a move can be significant. That is because the “basis” upon which the possible tax is assessed differs considerably depending on whether the home was given while the seniors is still alive or transferred after death.

When the real estate is given during the senior’s lifetime, the gift takes a “carryover” basis upon eventual sale of the house. Conversely, receiving the home after death results in a “step up” basis.

For example, consider a house that is worth $350,000 today and the senior father first bought the home 30 years earlier for $50,000. If the adult child receives the house while the parent is still alive, when the home is eventually sold to a third party, then the son will be taxed, roughly, as if he made a capital gain of $300,000 (the sale price from the first purchase price). Conversely, if the home is received after the death, then the sale to a third party will start with a $350,000 basis, and if the home is sold for that price, then zero capital gains are recorded (and no tax is owed).

The bottom line: Do not go it alone with estate planning. These issues are too important to do haphazardly, and there are no second chances. Contact our estate planning lawyers today to see how we can help.

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