Trust Use Has Positive Capital Gains Effect

Q: I am turning 75 years old soon and own my home outright. I understand that can leave my home to my daughter through my will, or deed it into a trust for her benefit upon my death. I can even transfer the property to her today for one dollar. What are the different capital gains tax effects of each option?

A: Generally, a capital gains tax rate of 5% to 15% is applied to the long term increase in value between an asset’s acquisition price and sale price. The asset’s value upon acquisition is called the asset’s basis value, which will vary depending on your decision of how to transfer your home to your daughter.

Of your three options, do not choose a direct transfer as it may result in a potentially major capital gain being passed onto your daughter. Specifically, a direct transfer to your daughter will cause her basis to be one dollar. The spread between one dollar and the price she receives when she sells the home will be her capital gain.

All is not lost with this option, as a portion of this gain may not be taxable if she uses the property as her principle residence for at least two years. This exemption value is $250,000 if single or $500,000 if married. Despite the exemption potential, I recommend using the trust option.

If the property is transferred by trust or by will, your daughter will receive a step up in basis value. Here, the basis value will equal the property’s market value on the date your daughter acquires the property. As you can imagine, the capital gain spread between this basis value and the sale price will be much lower in this instance.

As between the will or trust, there are more side benefits of using a trust, including the avoidance of probate which will cost your daughter money and delay after you pass away.

Attorney James Haroutunian practices estate planning and real estate law in Billerica at 630 Boston Road. Contact him to begin an estate plan or with questions at 978-671-0711 or email him at james@hlawoffice.com.