Retained Life Estate Basis
Assuming the following: a frail elderly person (mother) owns a home (worth little) and a lake-front cabin(worth much more, ie 50% of her estate) and the plan is to put the cabin into a retained life estate. Other assets(cash) exist. The question is two-part:
a.) Regardless of gift-tax rules, should the mother ''gift'' the cash to the kids first, who intend on funding improvements to the cabin? Or use the assets still in her own name and make the improvements before creating the life estate?
b.) If the kids receive the cash gifts and turn around and take out a loan for the improvements, how does their doing this affect their potential stepped-up basis?
1 Answer from Attorneys
Re: Retained Life Estate Basis
(a) It probably doesn't matter in the long run, but I always prefer that the senior keep more money and give away less. It's her money; she should not be left penniless. (b) It doesn't matter in terms of the step-up in basis who makes the improvement. The entire property should be in the mother's estate and should receive the step-up (assuming under the new tax laws that the mother's estate is under $1.35 million).
Have you considered using a trust. I usually prefer them for vacation houses.
If you need an elder law attorney in Minnesota, who could advise you on any local aspect to the above issue, check the directory at www.elderlawanswers.com.
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