While going over their finances for the new year, many well-intentioned parents may unknowingly plant a tax bomb for their children in their estate plan.
A story on fox61.com says the tax levied on the sale of an asset can vary drastically depending on how the asset became the property of the heir.
Parents may deed a residence to a child while they are alive to protect it from long-term care costs or to avoid probate.
Because the child did not pay the parents the fair market value, it means the parents have made it a gift. The parents may have paid $50,000 for the home but it is worth $200,000. So the heirs must pay tax on $150,000 when they sell it. If it is worth more than $200,000, they will have to pay more tax.
The parents could have made use of a revocable trust to own the home. Then it would be passed on at death and the child would owe no tax as long as the property was sold for what it was worth on the date of death.