Tax basis issues on transferring prop prior to death

[milliekc]

A person living in Florida is very ill and not expected to live. Her children are wanting to avoid probate on her home upon death. She has lived in this home for 35 years. In attempting to avoid probate, it creating other tax issues. The real estate person is trying to transfer ownership to the children in order to avoid probate. The document that they are using is a Warranty Deed. The Warranty Deed has the following verbage:
"This Indenture, made this (today's date) between (person who owns the property and is dying along with the address in Florida), Grantor, and/to (again name of person who owns the property), a life estate, without any liability for waste, lease and otherwise dispose of the property described herein in fee simple with or w/out consideration, w/out joinder by the proceeds derived therefrom; and upon death of the life tenant, the remainder, if any to (children's names here), as Joint Tenants with rights of Survivorship and Not as Tenants in Common, whos address is (address of children), Grantee.
Witnesseth: That said Grantor, for and in consideratin of the sum of Ten Dollars and no/100 (10.00), and other good and valuable considerations to said Grantors in hand paid by said Grantee, the receipt whereof is hereby acknowledged, has granted bargained and sold to the said Grantee, and Greantee's heirs and assigns forever, the following described land, situate, lying and being in Florida...
This is the most pertinent verbage in the Warranty Deed.
My concern is the basis that the Grantees will have with the Warranty Deed. To me, this appears to be a gift and their basis will be the Mother's basis. This Warranty Deed is supposed to avoid probate but my concern is the tax implications with this.
Can you give me any feedback on how this document plays out as far as what basis the children will have for tax purposes? Will their basis be the Mother's basis?

[seniorjudge]

Originally Posted by milliekc

A person living in Florida is very ill and not expected to live. Her children are wanting to avoid probate on her home upon death. She has lived in this home for 35 years. In attempting to avoid probate, it creating other tax issues. The real estate person is trying to transfer ownership to the children in order to avoid probate. The document that they are using is a Warranty Deed. The Warranty Deed has the following verbage:
"This Indenture, made this (today's date) between (person who owns the property and is dying along with the address in Florida), Grantor, and/to (again name of person who owns the property), a life estate, without any liability for waste, lease and otherwise dispose of the property described herein in fee simple with or w/out consideration, w/out joinder by the proceeds derived therefrom; and upon death of the life tenant, the remainder, if any to (children's names here), as Joint Tenants with rights of Survivorship and Not as Tenants in Common, whos address is (address of children), Grantee.
Witnesseth: That said Grantor, for and in consideratin of the sum of Ten Dollars and no/100 (10.00), and other good and valuable considerations to said Grantors in hand paid by said Grantee, the receipt whereof is hereby acknowledged, has granted bargained and sold to the said Grantee, and Greantee's heirs and assigns forever, the following described land, situate, lying and being in Florida...
This is the most pertinent verbage in the Warranty Deed.
My concern is the basis that the Grantees will have with the Warranty Deed. To me, this appears to be a gift and their basis will be the Mother's basis. This Warranty Deed is supposed to avoid probate but my concern is the tax implications with this.
Can you give me any feedback on how this document plays out as far as what basis the children will have for tax purposes? Will their basis be the Mother's basis?

I'll answer part of your question. The consideration language is a legal fiction.

(Google peppercorn consideration if you are really interested in the history.)

What makes it a gift is whether ma really gets any dough for it or not.

[shortbus]

This is a bad way to transfer real property from parent to children.

If the house is transferred prior to death for $10, it's basically a gift and taken subject to mom's basis. Meaning, children take ownership of the property with the accumulated cap gain still intact.

Whereas if the property is transfered after death, the children can take a stepped-up basis under s.1014 of FMV on date of death. This is much more favorable for the children, as the cap gain liability disappears.

If they also want to avoid probate, they should put the house in a trust, then they can still take advantage of s.1014.