Leaving Real Estate to Children

Leaving real estate to children, you’re generally far better off inheriting property than using a quit claim deed to put your name on title.

By Ilyce Glink and Samuel J. Tamkin

Q: Enjoy reading your articles! I am 60 and live in Maryland. My mom passed away recently and my Dad is 87. They jointly owned their primary residence and the mortgage is paid in full. My Dad’s will leaves the house to me and my two siblings.

Should I or one of my siblings put our name on the deed and/or title of the house now? Trying to minimize the probate process, plan ahead, and minimize taxes when my dad passes. Thank you.

Better off Inheriting the Property

A: As we’ve discussed many times, you’re generally far better off inheriting property than using a quit claim deed to put your name on title.

From a tax standpoint, when you inherit property, you receive it from the estate at its current market value rather than at the cost basis (typically the price paid by the owner). If you turn around and sell the property within a year, you will likely have no capital gains tax to pay.

Leaving Real Estate to Children

Here’s how it works. Let’s say your parents bought their home as joint tenants with rights of survivorship. When your mom died, your dad became the sole owner of the home. The cost of his half of the home is based on what he and your mom paid for the home years ago. He inherited your mom’s share of the home at its value at the date she died.

If he gives you three kids half the property now, the three of you would not get the benefit of the stepped up basis and could end up paying capital gains tax when you decide to sell the home.

Usually, when kids inherit the family home and sell it shortly after, they pay no federal income or capital gains taxes on that sale. But, if you are on title when your dad dies, you may end up paying taxes depending on what your parents paid for the home, how much they put into improving the home and the price you get for the home when it is sold.

This year, the federal estate tax exemption is $12.06 million. If your father’s total estate is less than that amount, there should be no federal estate tax. In Maryland, your father can pass down an estate of $5 million tax free. Above that, the estate tax rates range from 18 percent to 40 percent, according to SmartAsset.com. From an estate tax perspective, if your father’s total estate is less than $5 million, you likely won’t have any state estate taxes to pay.

Estate Taxes and Inheritance Tax

By keeping the home in your dad’s name, his estate won’t have to pay estate taxes and when you and your siblings get title to the home after his death, you likely won’t have any federal income or capital gains taxes to pay.

Maryland does have an inheritance tax of 10 percent, but the inheritance tax doesn’t apply if the heir is the decedent’s child or direct descendant, the spouse of a child or direct descendant, a spouse, parent, grandparent, sibling, stepchild or stepparent. So, you and your siblings should owe anything there.

It’s important to think about how your individual state taxes estates and inheritances when doing your estate planning. Often, families are unaware of hidden taxes, fees, or probate requirements. This is where it would be helpful to have an estate attorney and tax advisor engaged in the process of planning your father’s estate.

Might be Time to Review the Will

We’re glad to hear your father has a will. The fact that you and your siblings are discussing what to do with his property leads us to wonder whether your father has been included in these discussions. If not, and he’s up for it, you should discuss this together with the estate attorney who prepared his will. If he is no longer in touch with that estate attorney or wants to use a different attorney to update his will and other parts of his estate plan, perhaps you and your siblings can participate. That way, you’ll know what he’s thinking, and who to call when the time comes.