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Reverse Estate Planning

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Wouldn’t it be great if you could potentially avoid paying any income tax on appreciated investment real estate, homes, and stocks? Even sale of a business could be potentially tax free. So How do you achieve this miracle? The key is to use the advantage of having an elderly parent.

Prior to the new tax Tax Cut and Jobs Act tax law, tax lawyers recommended making gifts to children and grand children since there was a big estate tax on estates valued over 1 million dollars. Thus, getting assets out of your name was deemed good planning.

Today the estate tax exemption has risen to over 11 million per person. Thus, a husband wife couple can avoid estate tax on 22+ million of assets. This is a HUGE deal and provides an amazing loophole for those who will to take advantage of it.

The key is in knowing what happens upon death. When someone dies, all of their assets that are included in their taxable estate gets a step up in basis. This means that when those assets are sold after the decedent’s death, the beneficiaries get a cost basis equal to the fair market value of the assets at the time of death.

Example: Joe’s dad owns a home that he paid $45,000 many years ago. The home’s current value if $1,000,000. In addition, Joe’s dad owns some stock that he paid $200,000 that is currently worth $600,000. If Joe’s dad sells the home and stocks,he would have to pay tax on the difference between the sale price and his cost. HOWEVER, if Joe’s dad dies with the property, Joe’s basis in the home and stock is the fair market value which is $1,000,000 for the home and $600,000 for the stock. All tax is avoided on appreciation. So how does this help you?

Consider transferring appreciated property to your elderly parents. Upon their death, you will get a step up in basis to the fair market value upon their death!!!

Here are some examples of this type of planning:

  1. Normally, if you sell your principal residence, you can avoid up to $250,000 of gain per person ( Husband and wife gets to avoid up to $500,000) of gain, if they own and occupy their residence for 2 our of the past 5 years. However, if you establish domicile in another state ,, such as Florida, you may not meet the 2/5 year rule. Transferring your home to an elderly parent could avoid this problem since you will inherit the home at fair market value.
  2. You are about to sell your business for a bundle. However, you will pay tax on all of the appreciation. If you transfer the business or even part of the business to your parent’s name and wait until they pass away, you will get a step up in basis to the full fair market value and can potentially avoid all tax on sale of the business.
  3. You own a bunch of investment real estate that has appreciated greatly, If you sell these properties, you will have a whopping gain. However, if you transfer some or all of them to an elderly parent, the income can be used to support them while they are alive and upon death, you would inherit the property at a fair market value basis and avoid most income tax if sold soon thereafter.

Now there are some potential downsides that you want to consider. If your parent’s go to a nursing home, their assets including anything that you put in their name could be used to help pay nursing home costs. Likewise, if your parents get sued, these assets can be attached by creditors; thus, having a good liability umbrella, particularly if your parents are driving, becomes important.

It is also important that your parent;s will get modified so that you will inherit any property transferred to them.

I suggest that if you have very elderly parents, you should talk about this type of planning with a good estate planning attorney or elder law or tax attorney.

This can be a potentially valuable strategy that you should share with your friends and relatives.


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