There are generally two primary ways to avoid capital gains tax on an inherited property—sell it right away or disclaim the property. You may also be able to delay or reduce taxes by making it your primary residence or renting it out to tenants.
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Transferring property before death: An overview
Transferring property before death can offer several advantages, both for the individual who currently owns the property and for the beneficiary. However, it must be planned carefully with the help of a financial professional in order to capitalize on these benefits.
What are the benefits of transferring property before death?
Estate planning is all about creating the best circumstances for the transfer of wealth and assets from one generation to another. Often, valuable property and real estate are a significant portion of that wealth. That makes treating them with special care an important estate planning topic. So what is the best way to pass down your property? It may depend on your net worth. Some can get away with simply leaving property to their heirs in a will, but for many, planning to transfer the property early or leaving it in a trust can be more beneficial.
Why take this proactive approach? What is the advantage of gifting property? Well, for one, you will get to see your loved ones enjoy the benefits of the property during your lifetime. In addition to that, there are other concrete benefits, including:
Providing a potential reduction in estate taxes — If a total estate (including all assets) is above $13.99 million for 2025,1 then there will be estate taxes before assets can pass down to your heirs. When you transfer a home or other valuable property before death, the value is removed from your estate, which can be significant. However, since the lifetime gift tax exemption and estate tax exemption are tied together, there are some specific ways you need to plan this transfer, outlined below.
Preventing a lengthy probate process — Probate is a mandatory legal process that ensures a recently deceased person’s debts are covered and assets distributed according to their will. Particularly with larger estates, it can be an arduous and time-consuming process. Passing property down before your death removes it from this process entirely, which can help you avoid lengthy delays.
Mitigating potential disputes or claims on the property — Transferring property before death provides clear ownership rights. This can help in two ways: It can prevent arguments among family members on how to handle the property and, perhaps more importantly, it can eliminate the chance that valuables or even a home must be sold to cover outstanding debts when you die.
How to transfer property before your death
Passing property to heirs isn’t as simple as just giving them the deed (in the case of a home). There are steps you must take and legal documents to fill out. Plus, there are a few different ways you can accomplish your goal. Each of the following methods has its own tax implications and legal requirements, so it is advisable to consult with an estate planning professional to determine the best approach for your situation. By carefully considering your options, you can minimize complexities and ensure a smoother transition of your property to your heirs.
Gifting property before death
Gifting is a straightforward process, but often the one with the most drawbacks. Gift taxes will apply if the value exceeds the gift tax limit and will usually lower your lifetime gift tax and estate tax exemptions.
Using a life estate
A life estate is a legal arrangement that allows an individual, known as the life tenant, to retain use and control of a home or real estate throughout their lifetime, through joint ownership or transferring ownership to another party. This arrangement can help ensure that the real estate passes to the intended beneficiary without going through probate—while keeping control over the details, like maintenance, insurance, and taxes.
Creating a trust to transfer property
This approach involves setting up a trust in which the property is held and managed by a trustee on behalf of the beneficiaries. A trust is often the best way to leave real estate to heirs because it can offer more control and flexibility, allowing you to set specific conditions for when and how it is transferred. This can be especially important if your beneficiaries are underage or need asset protection. Trusts can also provide privacy and help in protecting assets from potential creditors or legal disputes.
Common reasons for transferring property before death
There are lots of reasons you may want to take this route. Some are financial. Others could be purely personal. Primarily, transferring property before death is used as a way to limit estate taxes for families with estates large enough to be taxed upon death. Since most assets go up in value over time, transferring it now can save taxes on the appreciation. Some may just want their heirs to be able to enjoy the property now. Another reason for passing a home or other valuable property to heirs before death is if you have significant debt. Gifting now takes it out of the estate and probate process, which means debtors can’t force a sale to cover those debts.
Potential risks and drawbacks
Signing over property before death is not without potential drawbacks. It must be considered carefully with help from financial professionals and tax advisors. If it isn’t set up correctly, there may be high gift taxes for you or capital gains tax for your beneficiary. If your heirs plan to sell particular property, it may also be better to transfer it upon death, due to stepped-up basis provision in tax law. Medicaid coverage could also be impacted. And of course, you lose control of the property to your beneficiary, which could be a drawback or a blessing.
Leaving property to someone in your will
If you don’t want to or can’t pass property to heirs before your death, you can still do so in your will. In fact, this is how a majority of Americans do it, and it is still one of the best ways to leave property after death. The key is crafting a well-detailed will, which provides a clear and legal directive on how the property should be handled. The executor of the will has a legal and fiduciary responsibility to the beneficiaries to do what is right. However, this path is not without its own drawbacks. For example, if liquid assets aren’t enough to cover the deceased’s debts, then there is a possibility that the property must be sold before it can be given to heirs. A financial professional can help with guidance on the best way to transfer your property.
Transferring property FAQs
It’s impossible to answer without knowing specifics about the situation. Depending on the details, one can be more beneficial than the other.
Yes. There are a number of ways you can inherit or otherwise transfer property before death, including living inheritance, life estates, trusts, or gifting.
Yes, but the legal and tax processes are different. Giving property to heirs before your death will often count as gifting, which has different rules and implications than inheriting that same property after you pass away.
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Neither New York Life Insurance Company nor its agents offer legal or tax advice. Please consult your legal and tax advisor to find out whether the general concepts discussed in this article apply to your personal circumstances.
1“IRS Releases Tax Inflation Adjustments for Tax Year 2025,” IRS.gov, Oct 2024