When it comes to estate planning, there’s no easy way out. We previously wrote about estate planning myths, and there are so many more that we didn’t cover. It can be a confusing process, especially with estate tax laws. Solutions that may seem simple could end up costing you and your loved ones many times over the dollar amount of a solid estate plan in the first place.  

If you have an aging parent, you may think it is easier to be added to his or her bank account or deed.  So, if something were to happen, then you could take over the finances or ownership of the home. While, technically, it sounds like a good idea, this actually may leave you with hefty tax bills by not taking the advantage of the step-up basis permitted under the current estate tax laws. 

Current Estate Tax Laws

There is currently a “step-up” in basis rule for capital gains on inheritances, either property or monetary assets. This means that any assets that you inherit would be taxed at the market value versus the price it was originally purchased for, typically leaving a lower tax bill. There is a proposal to remove this rule, but for this article’s sake, we will use this as the reason for planning your estate. It’s easier to demonstrate how the step-up in basis works on an example.

For example, taken from Investopedia, let’s say you inherit a house that was bought for $300,000 many years ago, and when you inherit the property, it is worth $500,000. Upon receipt of the house, you will get a step-up basis and pay no taxes on the house. So, your tax basis in the inherited house would be $500,000 or the current market value.  You then sell the house for $750,000, so you are only paying taxes on the difference between the selling price of $750,000 and your step-up basis price of $500,000, so $250,000 (assuming you don’t qualify for the primary residence exception). 

If it weren’t for the step-up rule, you would be paying taxes on the entire difference between the original purchase price of the property and sale price, i.e.  $450,000, leaving a hefty tax bill and a big reason not to just be added to the title of the property. 

What Should You Do?

Consult a professional! If your parent or loved one is getting to the point where they feel like it’s a good option to add you to their accounts, here are a few options that you could do, instead, to cover all the bases: 

Power of Attorney – your parents can give you both financial and/or medical power of attorney, so that when the time comes, you would have legal access to their financial and healthcare information.  So, if something happens, you can manage your parents’ assets without jeopardizing your eligibility to the step up basis. 

Your parents can give you and all members of your family, including kids, annual gifts up to the annual gift-tax exclusion, currently $15,000 per donor per person. So, each of your parents can gift you and each member of your family $15,000 without any tax liability. If you have four members of your family, your parents can gift your family annually $120,000 without any gift tax (15,000x2x4).

Trust-Based Estate Plan – Having your parents create a trust-based estate plan helps to ease the transition of their assets if something were to happen. Depending on their assets, the trust may also be able to preserve your assets in the event of incapacity and keep your estate out of probate and avoid certain taxes. 

There are many different options when it comes to estate planning documents and it’s best to consult a professional who can help you and your family create the best plan for your unique situation. We are here to help you. Contact us today to get started or review your current plan.

Disclaimer: This article is intended to serve as a general summary of the issues outlined therein. While this article may include general guidance, it is not intended as, nor is a substitute for, qualified legal advice. Your review or receipt of this article by Lexern Law Offices, Ltd. (the “LLG”) or any of its attorneys does not create an attorney-client relationship between you and the LLG. The opinions expressed in this article are those of the authors of the article and does not reflect the opinion of the LLG.