The simple answer: After you die. From a financial perspective, it is generally advantageous to gift property upon your death.
However, when making a decision about how best to leave real property to your children there are several important factors to consider. If you plan to keep living in the property, first and foremost is Control.
Gifting Property to Children During Your Lifetime
If you choose to make a lifetime gift of your home to your children then you must have their consent to continue living there. The advantage might be that if you become unable to take care of your own finances, your children can handle the responsibilities of maintaining the upkeep and paying taxes and insurance. But, by giving up control through directly gifting your property, an in-law spouse may lay claim to the ownership of the house in the event of a divorce. In terms of cost this is the least expensive option in the short term in transferring your property to another and can be done with one deed recorded with the county recorder.
Gifting Property to Children In A Will or Trust
Generally speaking, gifting property to children upon your death has the most financial advantages. Gifts of property held in a trust will be worth tens of thousands more because a trust avoids probate and capital gains taxes. Let’s take a look at the specifics:
Getting Down to Brass Tax
Upon the date of transfer there is a “step-up” in the property tax base to market value. But there is an exclusion for the transfer of real property from parent to child by filing a claim with the assessor’s office called “Claim for reassessment for transfer between parent and child”. In this scenario property tax can be saved either by using a trust or a direct gift. Bottom line: You get a break on property taxes whether you transfer property to a child during your lifetime or after.
Capital Gains Tax
Another factor to consider is capital gains tax. This tax is assessed on the difference between the purchase price and the sale price. For example, if a house is purchased for $500,00 and later sold for $700,00 then capital gains tax could be assessed on the $200,00 difference. Primary residences receive an exemption, but gifted property sold during the parents’ lifetime loses that exemption. Additionally, property transferred at the time of death is subject to a “step-up in basis” to market value upon the date of death. Property that has been gifted loses this “step-up in basis”. Bottom line: Gifting your property through a trust or will reduces or eliminates the capital gains tax. This is huge.
Probate is another factor that must be seriously considered. Under the supervision of the California probate court, which is open to the public, real property can be transferred from a parent to child (or children). The probate process in California is time-consuming and expensive. Probate is required even if there is a Will. Unlike a Will, a Revocable Trust avoids probate. Lifetime gifts do as well.
Why the Revocable Trust is the Way to Go
The Revocable Trust is the best way to maintain control and avoid hefty capital gains taxes or a complicated probate.
Gifting property through a Trust has the following advantages:
Avoids large capital gains taxes incurred by gifting and selling during your lifetime.
Allows you to maintain control of your home and plan for incapacity (through a successor trustee)
Specifies exactly how the property will be dealt with or split between children.
Avoids the cost, time, and complication of Probate
Avoids Property Taxes incurred by a sale
In short, a properly drafted trust allows you to control how and when your property is transferred to your loved ones. A properly drafted Trust saves your loved ones time, headache (& heartache), as well as money.
Consult an experienced Trust and Estate Attorney. Property is a significant asset that can incur significant costs on the back end if not planned for properly.