CLIENT STORY: Sudden Wealth

Illustrative image

Jumping the Gun on an Inheritance

A mother and son were both clients of TABR here in Southern California. The son, Brian, an educator, called to tell us that his mother had passed away after a sudden deterioration in her health. He went on to tell us that the day before his mother’s surgery, he and his sister transferred their mother’s home out of its trust registration into their names in a mistaken belief that this would be a favorable step from an inheritance standpoint.

We believed this was a serious error and explained why. The home had been purchased in the 1960s for a mere $10,000 but had a current estimated market value of about $530,000. Even if it was possible to deduct a certain amount from that total for improvements over the years, that would still leave an enormous potential capital gain. In fact, we estimated the surviving children would probably end up owing more than $100,000 in taxes. California state law has community property provisions which provide an automatic “step up” at death so that the capital gains statute would be reset to the date when the children inherited the property. Capital gains would only be calculated on any increase in value after that date. Putting the home in their name prior to their mother’s passing took away the “step up” and left them fully exposed to a large tax liability.

Fortunately, this story had a positive ending. Thanks to our intervention, the client sought to cancel or reverse the transfer. Fortuitously, due to a delay at the county recorder’s office, the paperwork had not yet been filed, so the family ended up avoiding a huge tax liability.

Disclaimer: These stories are for illustrative purposes only and are not real client stories.