Understanding transfer basis is crucial when considering asset protection strategies or gifting property to family members. Attorney Kellen Bryant explains why transfer basis can create significant tax problems and what you need to know before gifting assets.

Transfer Basis vs. Stepped-Up Basis: The Key Difference

Transfer basis works very differently from stepped-up basis, and the tax consequences can be dramatically different for your beneficiaries.

What Is Transfer Basis?

Transfer basis (also called “carryover basis”) means that when you gift an asset to someone during your lifetime, the recipient receives your original tax basis in the property, not the current market value.

Why Transfer Basis Creates Tax Problems

Unlike stepped-up basis at death, transfer basis does not provide favorable tax treatment. The recipient inherits all the capital gains tax liability that has built up over time.

Transfer Basis in Asset Protection: A Costly Mistake

When working with elder law attorneys on asset protection strategies, understanding transfer basis is essential. Many people unknowingly create tax burdens for their children while trying to protect assets from nursing home costs.

Common Asset Protection Transfer Scenarios

People often consider these transfers for asset protection:

• Gifting real estate to children
• Transferring stock portfolios
• Adding children’s names to property deeds
• Switching property ownership

The problem: All of these transfers result in transfer basis, not stepped-up basis.

How Transfer Basis Works: Real Examples

Understanding transfer basis through examples shows why it creates tax problems.

Real Estate Transfer Example

Imagine you bought your home in 1980 for $50,000. Today it’s worth $300,000.

If you gift the house during your lifetime:

• Your child receives transfer basis of $50,000
• If they sell for $300,000, they owe capital gains tax on $250,000
• Tax liability could be $60,000+ depending on tax rates

If your child inherits the house at death:

• Your child receives stepped-up basis of $300,000
• If they sell for $300,000, they owe $0 in capital gains tax
• Tax savings: $60,000+

Stock Transfer Example

You purchased stock for $10,000 that’s now worth $100,000.

Transfer basis (gift during lifetime):

• Recipient’s basis: $10,000
• Capital gains tax on $90,000 if sold

Stepped-up basis (inheritance at death):

• Recipient’s basis: $100,000
• No capital gains tax if sold immediately

When Transfer Basis Becomes a Problem in Elder Law

Asset protection planning often involves transferring assets, but this can create unintended tax consequences:

Medicaid Planning Considerations

• Transferring assets to qualify for Medicaid benefits
• Adding children to deeds for asset protection
• Gifting appreciated assets to reduce countable resources

The Hidden Cost

While these strategies may help with asset protection, they burden recipients with transfer basis and eliminate valuable stepped-up basis benefits.

Better Alternatives to Simple Asset Transfers

Experienced elder law attorneys can suggest alternatives that provide asset protection without sacrificing stepped-up basis:

Trust-Based Strategies

• Irrevocable trusts that preserve stepped-up basis
• Special needs trusts
• Income-only trusts

Other Asset Protection Options

• Medicaid-compliant annuities
• Proper timing of asset spend-downs
• Strategic use of exempt assets

Critical Questions Before Gifting Assets

Before making any asset transfers for protection purposes, consider:

• What is the current basis vs. market value of the asset?
• How much capital gains tax will the recipient face?
• Are there alternative protection strategies available?
• Does the asset protection benefit outweigh the tax cost?

Why Professional Guidance Is Essential

The interaction between asset protection planning and tax consequences requires expert analysis. An experienced estate planning or elder law attorney can:

• Calculate the true cost of transfer basis
• Identify strategies that avoid transfer basis problems
• Balance asset protection needs with tax efficiency
• Develop comprehensive plans that protect both assets and tax benefits

Don’t Let Transfer Basis Derail Your Planning

Before gifting property, real estate, or stock for asset protection purposes, understand the full tax consequences. Transfer basis can cost your family thousands in unnecessary capital gains taxes.

Contact the Berg Bryant Elder Law Group in Jacksonville, Florida today. Get professional guidance that protects your assets while preserving valuable tax benefits like stepped-up basis for your beneficiaries.

Don’t let well-intentioned asset protection create unintended tax burdens for the people you’re trying to help.