Family Estate Planning Attorney in Villanova, Pennsylvania

Should I give everything to my children while I am alive to avoid Inheritance Tax and probate fees?

Philadelphia, PA estates & probate lawyer Marc H. Jaffe explains why giving away property to avoid Inheritance Tax is usually a bad idea.

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The answer generally to that question is, no, you shouldn’t give away everything while you’re alive just to avoid Pennsylvania inheritance tax or just to avoid probate fees. Number one, with respect to Pennsylvania inheritance tax, if you give property away and you die within a year, it’s going to be subject to the tax anyway, so that hasn’t done you any good. But more than that, with respect to the inheritance tax, the inheritance tax is only 4.5 percent, so the benefit from it generally is going to be outweighed by the detriment. Probate fees in Pennsylvania – probate’s a simple process. Probate fees are generally low, so again, not a good reason to give away your property while you’re alive. And if you really want to avoid probate, there are other ways to do it.

What are the negatives in giving away property like that? Well number one, when you give away property, for example to your children, you lose the ability to step up their tax basis. So what does that mean? If I have property and I leave it to my children when I die, their tax basis in the property is the value of that property on the date I died. So if they turn it around the next day and sell it, they have no capital gain, don’t have to pay any income tax. On the other hand, if I give property to my children while I am alive, their tax basis is my tax basis. So if they turned it around and sold it after that, all of the appreciation in that property during my lifetime would be subject to a capital gains tax. So the income tax that you would have to pay by giving away the property usually outweighs the small inheritance tax you might have saved by doing that.

In addition, if you give your property to your children and they have problems with their creditors, that property may be gone. If they have problems with their spouses, it might be tied up in divorce. If you gave away your property to your children with the idea that, “If I ever need it, I can just ask it back from them,” well the problem is sometimes your children can’t give it back or won’t give it back. So overall, all of the negatives from giving away property to avoid inheritance tax or probate fees far outweigh the benefits of doing that for most people.

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