Joe Paterno Passes Away From Lung Cancer

Joe Paterno, the 85-year-old former Pennsylvania State University football coach, died over the weekend from lung cancer.  Paterno transferred his house into trust back in July, less than four months before the child abuse scandal involving Jerry Sandusky erupted. Many speculated that Paterno transferred the house to shelter it from creditor’s in the event he was sued and found personally liable as a result of the scandal. However, this plan would not have worked as it was a fraudulent conveyance.

Others speculated that the transfer was for the benefit of Paterno’s wife. If this was Paterno’s intent, ironically, the transfer could end up increasing the income tax when the trust eventually sells the house. Inherited assets receive an adjustment in basis to their value on the date of the decedent’s death. Appreciated property will receive a step-up in the cost basis, and this step-up can reduce or eliminate the capital gains tax heirs pay once the property is sold. Paterno’s property lost this step-up in basis because it was transferred into trust.

In situations where one spouse will more than likely out live the other (usually do to health issues) and the property in question has appreciated significantly, the couple should consider transferring the property solely in the sick spouse’s name so the property will receive the step-up in basis upon his or her death. However, it is important to keep in mind that a provision in the Internal Revenue Code prevents a healthy individual from transferring all his or her assets to a dying individual (with no gift tax) and receiving the assets back with a step-up upon the sick individual’s death.

See Deborah L. Jacobs, Monday Morning Quarterback: Joe Paterno’s House Transfer Was a Dumb Tax Move, Forbes, Jan. 22, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.