Sometimes this seems like the easiest and cheapest solution which can be done without a lawyer’s involvement. However, any knowledgeable estate planning attorney will tell you never to resort to such an option for number of reasons:
1) When you transfer property during life as an outright gift, you lose a number of very important tax benefits. The main tax benefit of receiving a step up in basis when the child inherits the property via Trust or a Will. Instead of transferring the property which has inherent capital gains in it which will cost your children roughly 30% in capital gain tax, you can leave a property to your children via a Trust. This way, when the children sell the property after you are gone, their new basis would be fair market value of the property at death, and your children will completely avoid all unrealized capital gain tax accumulated during your life.
2) A second reason is that while the property is in Trust for the benefit of your children, you can still retain the right to occupy the property and can continue to benefit from various property tax exemptions, such as STAR or enhanced STAR programs. You can also continue to deduct your real estate tax and use the $250,000/$500,000 exemption on the sale of the primary residence while the property is in Trust.
3) Additionally, you do not want to lose your property to the creditors of your children. While your property is protected from foreclosure actions as being a primary residence, it would not enjoy the same protection if it belongs to your children who do not reside there and it is treated as an investment property when it comes to collection actions by their creditors.
4) Lastly, by creating a Trust you have a unique opportunity to protect your property from creditors of your children not just during your life, but for the rest of their life. Their creditors, present or future, including their spouses, would never be able to reach that property, as long as the child enjoys the property in the Trust.
Outright transfers of property to children are commonly recommended by attorneys who do not practice in the estate planning field. If you would like to preserve your real property, please contact us so we can discuss the best solution for you.
