Huntington Beach, CA (PRWEB) November 10, 2016
In this Tip Sheet by Mark W. Bidwell, a California attorney weighs the pros and cons of gifting real property while living instead of the post death transfer of real property by trust. Factors to consider are control, property tax, capital gains tax, probate and cost.
Ownership means control. Parents give up control with a life time gift of real property. Loss of control means the inability to sell, borrow or reside in the home without the consent of the children. In the event of a divorce an in-law spouse may claim an ownership interest in the real property.
But as parents age and are unable to financially take care of themselves ownership by loving children could be advantageous for quick action and proper upkeep of the home. But keeping control and transfer of control due to incapacity can be also be done with a trust. To maintain control over real property the advantage goes to control by trust.
Any transfer of real property ownership in California is subject to a step-up in the property tax base to market value as of date of transfer. There are exclusions to the automatic step-up. One such exclusion is a transfer from parent to child. The exclusion is claimed by filing with the assessor’s office a “Claim for Reassessment Exclusion for Transfer between Parent and Child.” Property tax can be saved by either gift or trust.
Capital gains tax applies to any sale of real property for a gain. Tax is assessed on the difference between the purchase price and the sale price. Primary residences receive an exemption. Gifted property sold during the parents’ lifetimes losses the exemption. Worse property transferred at death receives a step-up in basis to market value as of date of death. This step-up is lost with transfers of property by gift. For reduction or the elimination of capital gains tax the advantage goes to trusts.
Probate is the transfer of real property from parent to child under the supervision of the California probate court. Probate is costly, time consuming and open to the public. Both lifetime gifts and trusts avoid probate.
Immediate cost is a factor in every decision. A gift of real property is done by one deed recorded with the county recorder. The cost to have a deed prepared ranges from $100 to $300. Transfer by trust requires a trust document and a deed transferring the real property into the trusts. Cost for trusts range greatly from $350 to $2,400. The cost factor goes to transfer by gift.
Factors to consider when comparing gifts of real property to at death transfer by trust are; control, property tax, capital gains tax, probate and cost. Transfer by gift gives up control, may incur unnecessary capital gains tax but the upfront cost is cheaper than a trust. Trusts maintain control over the real property, reduce or even eliminate capital gains tax but incur more upfront costs.
Both gifts and trusts avoid probate and are exempt from property tax increases. To maintain control over the real property and reduce or eliminate capital gains tax, a trust for on death transfer is better than a lifetime gift of real property.
This Tip Sheet is provided by Mark W. Bidwell, an attorney licensed by the state of California. His office is located at 4952 Warner Avenue, Suite 235, Huntington Beach, CA 92649. Phone is 714-846-2888.