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Taxes, life estates and other estate planning considerations, P.2

On Behalf of | Jun 13, 2011 | Estate Planning |

In our previous article, we began discussing various things a person would want to take into consideration before entering into an arrangement in which one purchases or accepts a gift of property from another while allowing the donor or seller to continue living on the property till death. We already mentioned that, if the property is left under the person’s will, there will be questions of inheritance tax. If the property is gifted or sold as less than fair market value, there will be gift tax considerations.

One of the big takeaways from the article is that it is important in estate planning to understand one’s goals and the various ways one has a achieving those goals.

One question that arises is whether a life estate is a better setup than a gift or an outright sale. One alternative, if the disabled cousin wishes to live in the property till death and then pass it on to his cousin, is to keep a life estate in the property for himself and sell what is called the remainder interest to his cousin. In such a setup, the disabled cousin would be responsible for property tax and utilities, and he could deduct the property taxes on his income tax return. If he chooses to sell the house outright, he cannot deduct property taxes, though, since he isn’t legally responsible for them. A life estate in such a situation would guarantee the disabled cousin the right to live in the home until death, regardless of the situation of his cousin.

Capital gains tax is yet another consideration. There may be capital gains tax if the property is later sold for more than what is paid for it. The basis used for the capital gains tax will be what the cousin pays for the property. Capital gains tax is levied on any amount above the basis.

Prior to setting up any arrangement such as this one, there are multiple things to consider. The course one ends up taking is dictated by a number of factors, especially ones estate planning goals. It is helpful to consult a knowledgeable attorney prior to making any significant estate planning decisions.

Source: Star Ledger, “‘Know your goals,’ estate planners say,” Karin Price Mueller, 7 June 2011.