Co-owning real estate?

[Josh]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

[mike]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

Exactly. It is advantageous for tax reasons also, and my attorney told me once that the estate tax is one that he can in good conscience help people to avoid. However, he said, most people don't do it because they can't depend on their children not to kick them out of their home once it is deeded over to them.

[Josh]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

Exactly. It is advantageous for tax reasons also, and my attorney told me once that the estate tax is one that he can in good conscience help people to avoid. However, he said, most people don't do it because they can't depend on their children not to kick them out of their home once it is deeded over to them.

Well, they could just help their children buy homes instead of necessarily selling off their own home. It's pretty sad people can't depend on their children. Ultimately, we all depend on either our own children or someone else's to take care of us when we're old.

[Ken]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

Exactly. It is advantageous for tax reasons also, and my attorney told me once that the estate tax is one that he can in good conscience help people to avoid. However, he said, most people don't do it because they can't depend on their children not to kick them out of their home once it is deeded over to them.

In 2022 the Federal estate tax does not kick in until you reach estates over $12.06 million and then only on the balance of the estate that is over that amount. Your tax attorney must have a lot of really wealthy clients if estate tax planning is a major part of his business. Unless we are talking about a state estate tax that has a much lower estate limit. Only about 0.1% of all estates even have to file the IRS estate tax reporting form and only a much smaller 0.04% of all estates owed any estate tax in 2020, the last year for which data are available.

[Neto]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

I am by no means an "inheritance attorney", but inheritance has the advantage of the roll forward of the cost basis upon inheritance, which doesn't happen if you are still living when you give a property or stock holdings to your children. So if you inherit stocks or property, when you sell it your capital gains tax will be based on the value as of the date of inheritance (that is, the date your parent died). But if it is given to you, the capital gains tax will be based on the value when your parent purchased the property or stocks. (Please enlighten me if I am incorrect in this. I think the only way to get around these additional taxes is to place your holdings into a irrevocable trust, which means that you no longer have any control over it; as soon as you sign it, anything placed into that trust becomes the property of the beneficiaries, or maybe they're called trustees in that case.)

[Ken]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

I am by no means an "inheritance attorney", but inheritance has the advantage of the roll forward of the cost basis upon inheritance, which doesn't happen if you are still living when you give a property or stock holdings to your children. So if you inherit stocks or property, when you sell it your capital gains tax will be based on the value as of the date of inheritance (that is, the date your parent died). But if it is given to you, the capital gains tax will be based on the value when your parent purchased the property or stocks. (Please enlighten me if I am incorrect in this. I think the only way to get around these additional taxes is to place your holdings into a irrevocable trust, which means that you no longer have any control over it; as soon as you sign it, anything placed into that trust becomes the property of the beneficiaries, or maybe they're called trustees in that case.)

That is basically right. Except that banks have created additional avenues for the wealthy to avoid ever paying any tax all together.

Say you inherit a $100 million estate. You get the cost basis rolled forward as you describe. But instead of selling assets to live on your wealth and owing tax, your private banker gives you a $1 million loan each year with your stock holdings as collateral and you spend that money and just keep rolling those loans forward until you die and your estate settles those debs before passing on your assets tax-free to the next generation, rinse and repeat. You go your whole life living off your inherited wealth but never show any income or realized capital gains so you never owe a dime of taxes. And you pass on your now $500 million estate to your heirs so they can do the same. Without an estate tax many ultra rich would never pay a dime in federal taxes ever. And of course with trusts there are ways around even that. Meanwhile all your maids and gardeners and nannies owe taxes on every dime they earn.

The schemes are much more sophisticated and complex than that, but that is the gist of it.

[mike]

One rather obvious thing to do is to just distribute your wealth to your children before you die, rather than after. Real estate is a rather obvious place to make such transfers. It has an added benefit that your children might start lobbying you to pick one of them to live with and try to build you a nice dawdy house.

Of course, this approach might not make sense if you think none of your children will want to take care of you when you're old.

Exactly. It is advantageous for tax reasons also, and my attorney told me once that the estate tax is one that he can in good conscience help people to avoid. However, he said, most people don't do it because they can't depend on their children not to kick them out of their home once it is deeded over to them.

In 2022 the Federal estate tax does not kick in until you reach estates over $12.06 million and then only on the balance of the estate that is over that amount. Your tax attorney must have a lot of really wealthy clients if estate tax planning is a major part of his business. Unless we are talking about a state estate tax that has a much lower estate limit. Only about 0.1% of all estates even have to file the IRS estate tax reporting form and only a much smaller 0.04% of all estates owed any estate tax in 2020, the last year for which data are available.

I'm talking about state estate tax, which in Pennsylvania is 4.5% for transfers to direct descendants and lineal heirs. Depending on the value of the estate, it is at least an inconvenience and potentially a major expense for heirs, especially if the estate is largely illiquid (i.e. a farm, business, or large piece of property).

Another common reason for transferring real estate to one's heirs ahead of time is to prevent Medicaid from filing a claim against one's house after death in order to cover nursing home care costs. Gifts and transfers of assets can be penalized by Medicaid if they were made in a five year period prior to application for assistance with long term care.

So there are various benefits in parents transferring their wealth to their children while still living, and well in advance of their death, if that is what they want to do.

I don't see much wrong with parents who decide otherwise, or who decide to leave all of their assets to charity. I have close relatives who have told their children that their farm, purchased many years ago from parents for very reasonable sum and providing a somewhat meager income for the family all their lives, but which is now worth serious money because of real estate values these days, will be left to a mission organization. I don't see anything wrong with this, especially given none of the heirs are really in need of a farm they don't want to run anyway.

[mike]

Another common reason for transferring real estate to one's heirs ahead of time is to prevent Medicaid from filing a claim against one's house after death in order to cover nursing home care costs. Gifts and transfers of assets can be penalized by Medicaid if they were made in a five year period prior to application for assistance with long term care.

By the way, my attorney said that he does not like helping people shuffle assets in this way in order to avoid paying for potential future long term care, because it's trying to get something for nothing.

I had a neighbor once whose wife began to show signs of disease, and ended up being diagnosed with dementia after some time. When they began to notice something was wrong, my neighbor very quickly transferred their house to their children. I assume it was for these reasons. She did eventually need nursing home care and passed away after several years I believe.

[Ken]

Exactly. It is advantageous for tax reasons also, and my attorney told me once that the estate tax is one that he can in good conscience help people to avoid. However, he said, most people don't do it because they can't depend on their children not to kick them out of their home once it is deeded over to them.

In 2022 the Federal estate tax does not kick in until you reach estates over $12.06 million and then only on the balance of the estate that is over that amount. Your tax attorney must have a lot of really wealthy clients if estate tax planning is a major part of his business. Unless we are talking about a state estate tax that has a much lower estate limit. Only about 0.1% of all estates even have to file the IRS estate tax reporting form and only a much smaller 0.04% of all estates owed any estate tax in 2020, the last year for which data are available.

I'm talking about state estate tax, which in Pennsylvania is 4.5% for transfers to direct descendants and lineal heirs. Depending on the value of the estate, it is at least an inconvenience and potentially a major expense for heirs, especially if the estate is largely illiquid (i.e. a farm, business, or large piece of property).

Another common reason for transferring real estate to one's heirs ahead of time is to prevent Medicaid from filing a claim against one's house after death in order to cover nursing home care costs. Gifts and transfers of assets can be penalized by Medicaid if they were made in a five year period prior to application for assistance with long term care.

So there are various benefits in parents transferring their wealth to their children while still living, and well in advance of their death, if that is what they want to do.

I don't see much wrong with parents who decide otherwise, or who decide to leave all of their assets to charity. I have close relatives who have told their children that their farm, purchased many years ago from parents for very reasonable sum and providing a somewhat meager income for the family all their lives, but which is now worth serious money because of real estate values these days, will be left to a mission organization. I don't see anything wrong with this, especially given none of the heirs are really in need of a farm they don't want to run anyway.

Oh sure. That kind of middle class estate planning is fine and appropriate. And driven by the inexcusably inadequate long term care insurance in this country compared to other developed countries. Nursing home care is something that really should be covered by Medicare, which is not means tested, rather than Medicaid, which is for the very poor. Fold long-term care into Medicare instead of Medicaid and you do away with most of the need to play those games. It would mean we all pay slightly more in Medicaid taxes during our working lives. But then it wouldn't be getting something for nothing. We would have paid for it.