In estate planning the question is sometimes asked: Can I use a quit claim deed to transfer my home directly to my children or heirs as an estate planning technique?

The short answer is: be very careful. A quit claim deed is a well known and simple means of transferring real estate, so much so that it is often mistakenly referred to as a “quick claim deed.”

But consider the tax consequences of a lifetime transfer of real property. Such a transfer could trigger gift tax consequences, depending on the fair market value of the property that is transferred.

For 2018, a person may make a gift of up to $15,000 per person per year without triggering any gift tax consequence (this amount is subject to change). But if the value of the property transferred is above this amount, the donor will need to file a form 709 gift tax return. In order to avoiding paying tax on the gift, the donor may need to use part of his or her lifetime transfer tax exemption (which for 2018 is $11,180,000 — and covers gift, estate and generation skipping transfer taxes).

This may not seem like a big deal to the average person of moderate means. But, in addition to the hassle of filing a form 709 (with potential penalties if not timely filed), there are other potential tax consequences as well.

A lifetime transfer of property causes the recipient to retain the cost basis of the transferor. This is called the carryover basis. It is the amount the donor invested in the property, along with possible adjustments, such as depreciation or improvements to the property. Thus, when the recipient ultimately sells the property, he or she will pay capital gains tax on the difference between the sales price of the asset and the original purchase price (with certain adjustments as mentioned above). This will not typically be advantageous, particularly for highly appreciated property.

On the other hand, an inherited asset receives a step up in basis to the fair market value (FMV) of the property as of the date of the decedent’s death, or the alternate valuation date (which is six months after death). Thus, inherited property can often be sold with little, if any, tax implications.

Placing real estate, such as one’s primary residence, into a revocable living trust (RLT) will allow the beneficiaries to take advantage of the stepped up basis of the property at the decedent’s death, thus optimizing tax savings as compared to a direct lifetime transfer of the property. Holding real property in an RLT also avoids the need for opening a probate case after the decedent’s death. This can save filing fees and attorney fees and allow for a more streamlined administration of the estate.

Contact our office for more information on a revocable living trust, or for a free estate planning consultation.

This material should not be construed as legal advice for any particular fact situation, but is intended for general informational purposes only. For advice specific to any individual situation, an experienced attorney should be contacted.