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Tax Planning for Non-Taxable Estate after the New Tax Law

Client, whose husband died relatively recently, is concerned about the potential negative tax impact of the recently passed Tax Cut and Jobs Act (hereinafter the “Tax Act”).  Client has 2 pieces of real estate (her home and a property in which her daughter live).  The combined property taxes of the 2 properties exceed $10,000.  The Tax Act permits a deduction only up to $10,000.  The properties are presently in an asset protection trust that not only protects client from creditors and long-term care costs, but it also protects her daughter (after client’s death) from creditors and a potentially bad marriage.  Of course, the simple answer is to just deed the non-homestead property to her daughter so that each of them could still deduct property taxes up to $10,000.  However, other pros and cons needed to be discussed including the following:

The Negatives:

  • Filing of a gift tax return by client, although there would be no gift tax
  • Once the property is owned by daughter, she can do whatever she wants with the property, including giving the property either during life or at her death to anyone she wants (client may have preferred the property go to either to her son or her grandchildren)
  • If client held the property, there would be no capital gains on the appreciation from the date of client’s husband’s death to the date of client’s death
  • Loss of protection if daughter is disabled at client’s death

The Positives:

  • Taking full advantage of the $10,000 deduction for the property taxes
  • Daughter could make the gifted property her home thus saving property taxes
  • If daughter makes the property her homestead (and she presently lives there), there would be no capital gains tax on the first $250,000 of gain from the date of her father’s (client’s spouse) death (there was a step up in basis to that amount since it was jointly owned by client and her spouse and Texas is a community property state)
  • If daughter makes property her homestead, then the property should generally be protected from creditors until her death
  • No gift taxes should be due since client’s estate is below the permitted limits

One other possibility is for client to rent the property to daughter for an amount to include all expenses as then the property tax deduction would be permitted.

Whether client deeds the property to her daughter or not this is an illustration of an estate planning decision a client can make after taking consideration not only income taxes, but also property taxes, capital gains taxes, gift taxes, creditor protection and protection from issues related to daughter’s marriage (if married at the time of client’s death) or potential disability of daughter at the time of client’s passing.

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