This is often done as a form of estate planning, but in my opinion, the pros and cons are very mixed, as there are better vehicles out there to avoid probate. Also, the children forfeited their step-up in basis when buying the property for $10, but the grandchildren will receive a step-up in basis on their share. It should also be noted that this is a tenancy in common scenario, in which the title can pass in a variety of ways: through probate, sale, gift, or via operation of law through a trust or will.
This scenario does not make much sense, unless the goal was purely to avoid probate, but it stuck the children of the parents with a large tax burden if they chose to sell their interests in the property. The grandchildren will get an FMV step-up assuming the property is not sold.
EDIT: To clarify, the children of the parents, Gen 2 of 3 will pay gains and not receive a setup. Gen 3, after inheriting the property as tenants in common, will receive a FMV step-up equivalent to 1/3 of the property value. Only the grandchildren will get the step up otherwise, if the property is sold, the remaining 2/3 owned by Gen 2 will have to pay capital gains.
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This is often done as a form of estate planning, but in my opinion, the pros and cons are very mixed, as there are better vehicles out there to avoid probate. Also, the children forfeited their step-up in basis when buying the property for $10, but the grandchildren will receive a step-up in basis on their share. It should also be noted that this is a tenancy in common scenario, in which the title can pass in a variety of ways: through probate, sale, gift, or via operation of law through a trust or will.
This scenario does not make much sense, unless the goal was purely to avoid probate, but it stuck the children of the parents with a large tax burden if they chose to sell their interests in the property. The grandchildren will get an FMV step-up assuming the property is not sold.
EDIT: To clarify, the children of the parents, Gen 2 of 3 will pay gains and not receive a setup. Gen 3, after inheriting the property as tenants in common, will receive a FMV step-up equivalent to 1/3 of the property value. Only the grandchildren will get the step up otherwise, if the property is sold, the remaining 2/3 owned by Gen 2 will have to pay capital gains.