Your parents are starting to plan for the future. They are updating their wills and taking care of items like powers of attorney, healthcare directives, etc.
And they have decided to downsize.
Setting aside all that downsizing means in terms of going through the house they’ve owned since you were a kid, cleaning up and cleaning out decades of items that represent a lifetime of memories, they are also thinking about how their new, smaller home will fit into their estate plans. So they chat with you about putting your name on the deed, in addition to their own. What should you do?
You might encounter this question whether or not you are the executor of their estate. In fact, if you’re like most people, and if your parents are still healthy, you understand very little about your possible role as executor or the primary duties of an executor before and after they die.
And though this matter does not cleanly fit within the executor duties, it is a good idea to know a bit about the basics of the topic of having your name on a deed of a house you might otherwise inherit.
Having your parents put your name on the deed of a home you would inherit at their death constitutes a gift from your parents to you. While there is a federal gift tax, and a gift tax return would almost certainly need to be filed for the gift of a home, it is also highly likely you would not have to pay tax on the gift because of the multi-million dollar lifetime exemption.
The bigger tax consideration is not the gift tax, but the capital gains tax implication. At the risk of oversimplifying the matter, think of capital gains tax as the tax you must pay on the difference between the value of the home when you acquire it vs. when you sell it. Generally, home values go up, so you would have to pay tax on your “profit.”
For example, if your parents purchase a garden home as their downsized home and it costs $250,000. If your name is on the home from the time of purchase, too, and you sell it soon after they die for a price of $350,000, you have to pay capital gains tax on that $100,000 difference.
Unlike receiving a home as a gift, when you inherit a home, the tax value of the home to you is the value at the time of death. So if your parents purchased the garden home for $250,000 and the home was valued at $350,000 at the time of their death, you would not be responsible for any taxes on the difference between the purchase price and value at death. This is because of something called “stepped up basis,” which can benefit you on a house (the same idea applies to any stocks they may own). Of course, if you later sold the home later for $400,000, you would be responsible for the $50,000 capital gains on the difference between the value at death and the price when you sold it.
There may be situations where, despite the tax differences between owning vs. inheriting, it might make sense to go with what may not make the most financial sense on its face. Perhaps you want to avoid having to handle the transfer of a home through the probate process—time is money and you may value not having to wait for the lengthy probate process to play out. Everyone has a different personal situation, and the laws in every state are different, so talking to a professional is always a good choice before making any estate-related decisions.
Or, after consulting with your accountant and the estate attorney, you realize there may be other ways to avoid having the home as part of the probate process. Talk with these experts about things like a life estate in the home or a trust. There will be costs associated with the documents required to set these up, so be sure to ask about those costs so you can make an informed decision and have all the options outlined as you decide how to proceed.
As your parents are making their estate plans and considering big decisions about their property and assets, encourage them to work with the pros like accountants and tax attorneys, and with the beneficiaries in their will, especially on items that may have tax implications immediately or down the road. Sometimes making something easy in the short term, might make it more expensive in the long term, or vice versa. Communicating with beneficiaries is important on other fronts, too, especially when it comes to their decisions on executor compensation. And encourage your parents to get an Executor plan. Executor.org can help guide them through the 100+ tasks an executor has to complete as they work through the executor duties, and help them identify questions they have for the professionals and information they need to share with their executor.
Executor.org helps executors navigate their executor duties. Personalize your plan and learn about important questions like whether you should be compensated as an executor. With the right team helping you manage your executor duties, you can conquer the executor role.