Use a Trust or a Gift? One Could Save Your Family Thousands

When it comes to passing down your home or other valuable property, the decisions you make today can have significant financial implications for your loved ones tomorrow. Many families in North Carolina assume that gifting a property to their children during their lifetime is the simplest way to transfer ownership. Unfortunately, what seems like an easy shortcut can often lead to tens of thousands of dollars in unnecessary taxes.

Let’s explore the difference between gifting property now and transferring it through a trust — and why the latter often provides a much better outcome for your family.

Gifting Property: The Costly Carryover Basis

When you gift your home to your children while you’re still living, they immediately become the legal owners. Along with that ownership, however, comes what’s known as a carryover cost basis.

That means your original purchase price — the amount you paid for the home — becomes your children’s cost basis, too. So if you bought your home decades ago for $200,000 and it’s worth $800,000 today, your children inherit that original $200,000 basis. When they eventually sell the home, they’ll owe capital gains tax on the $600,000 increase in value — a hit that could easily reach tens or even hundreds of thousands of dollars.

Under IRS basis rules, gifted property retains the donor’s original cost basis, which is precisely what makes lifetime gifting such a costly mistake for families with appreciated real estate.

Transferring Property Through a Trust: The Step-Up in Basis Advantage

Now consider the alternative: placing your home in a trust as part of your estate plan. When structured correctly, you retain full ownership and control of your property during your lifetime. Upon your death, the property passes seamlessly to your beneficiaries.

Here’s the key advantage: this transfer triggers what’s called a step-up in cost basis. Instead of inheriting your original purchase price, your children inherit the property at its fair market value on the date of your death. If they decide to sell shortly after, they can often do so with little to no capital gains tax liability — sometimes avoiding it altogether.

This single planning decision can save your family thousands of dollars, keeping more of your wealth where it belongs — with your loved ones, not the IRS.

A Note on Irrevocable vs. Revocable Trusts

It’s worth noting that not all trusts work the same way for tax purposes. A revocable living trust generally allows the step-up in basis because you retain ownership during your lifetime. An irrevocable trust, by contrast, may offer other benefits like asset protection and Medicaid planning, but the tax treatment can differ. Our attorneys can help you understand which structure makes the most sense for your situation.

Plan Now, Save Later

Gifting property might seem like the easier route today, but without understanding the tax consequences, it can cost your family dearly. By establishing a trust, you’re not only protecting your assets — you’re ensuring a smoother, more tax-efficient transition for your heirs.

Estate planning is more than just paperwork. It’s about preserving your legacy and making sure the right decisions are in place long before they’re needed. If you’d like to explore how our personalized approach can help protect your family’s financial future, contact us to schedule a free Discovery Call. From there, you’ll meet with one of our attorneys for an Initial Strategy Meeting to discuss the options and pricing tailored to your needs.

Call our office at 919-659-8433 or schedule your free Discovery Call directly at your convenience: calendly.com/caryep/discovery-call-get-started-cep-blog