07 Oct How should our mom title her homes for estate planning purposes?

Q. My mother is a non-resident property owner with a primary residence in Pennsylvania and a second property in New Jersey. For estate planning purposes, is it best that my mother transfer her property into all of her children’s names and remove her name from the deed or should she keep her name on the deed and add the children on with her? Which is the best approach considering possible capital gains, inheritance taxes and exit taxes?
— Beneficiary

A. We’re glad to hear she’s planning ahead.

You’ve mentioned several options, but not all.

The answer? None of the above, said T. Matthew Wolfe, an attorney in the wills, trusts & estates and taxation practice groups at Einhorn, Barbarito, Frost & Botwinick in Denville.

He said the first question your mother needs to answer is what she wants to happen to the property in New Jersey.

Is it an investment property that has a current renter? Is it a vacation home that the kids plan on using after she passes away? Is the plan to sell it after she dies?

And importantly, are all the kids in agreement with the plan on the house?

Wolfe said your mom should not transfer it outright to the kids.

“Your mom has a `basis’ in the house, which is the price she paid for the house plus the costs of any improvements she has made,” he said. “It is likely that the current fair market value of the house is substantially higher than her basis in the house.”

If she gifts the house to her children, the children will take her basis in the house, Wolfe said. That means if the kids sell the house in the future, there will likely be substantial capital gains – fair market value of the house minus the basis in the house – and a resulting tax that must be paid on that capital gain, he said.

However, with a well-drafted estate plan, your mother can leave the house to her children after she passes away.

“Doing this will create a `step-up’ in basis on the property – the property’s new basis will be its fair market value at her date of death,” he said. “This could reduce potential capital gains taxes in the future when the estate of the children subsequently sell the house given the stepped-up basis in the property.”

Wolfe said your best bet is to come up with a plan for the house, then talk to an attorney who is familiar with taxes as well as estate planning.

“Too often parents will transfer houses to their children thinking it is the easy thing to do, without realizing the host of legal problems it could open up in the future,” he said.

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This story was originally published on Oct. 7, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.