Passing Your Home to Your Children.
When/ How/ If: I Should Deed My House to the Kids
There can be some benefits, but also drawbacks to both the gift giver and recipient(s).
(Speak to your accountant/ lawyer/ lender/ and insurance agent for specific advise – the following is excerpts from counsel received and not to take the place of paid advisers in their respective field of licensing.)
- Add the child’s name onto the existing deed.
- Make an outright gifting over.
- Deed over but reserve a life estate.
- Will the property, i.e: a “transfer on death”.
- Others consider a revocable trust, irrevocable trust, or a family LLC.
#1, Possibly Tax Disaster.
- Set up an office visit. There are good reasons, but often more bad reasons to use this strategy.
#2, Outright Gift.
- Irrevocable, the parent loses control and legal right to stay in home. Perhaps the parents will rent back.
- Ends the parent’s right to claim any preferences on property tax bills, e.g.: the homestead exemption, being blind or over 65, hardship/ low income exemptions.
- This can dramatically increase property taxes.
- If real estate transferred to a child is worth more than what was paid to purchase and improve it, then the child pays capital gain tax on the sale of the property. (The $250k/ $500k MFJ primary residence exemption is not applicable unless you own and live in the property).
- Children’s (ex)spouse and creditors may have the ability to seize the property.
- vs. Will at death.
- If a parent’s Last Will and Testament leaves real estate to a child, parent can change their mind w/ a new will.
- Additional Parent Considerations.
- To remove the asset for Medicaid qualification, remember that a transfer of your real estate can make the parent ineligible for benefits for nursing home expenses, depending on when you enter the home. The length of time ineligible depends on the value of the real estate, whether it was transferred outright or retained as a life estate. Generally, its a five years look back.
A transfer of real estate is a “gift” and will no doubt require filing Tax Form 709 with the IRS.
#3, Gift with Retained Life Estate.
- During life, the parent has the right to live in the property, and at death the life estate ends. Property transfer effectively at that time.
- Some want to avoid probate after death, and possibly to avoid any court administration of their estate.
- If the recipient child dies first, the child’s share in the real estate could pass to the deceased child’s spouse, rather than to the grandchildren.
- vs a parent’s Last Will and Testament may provide that an inheritance would go to grandchildren if a child died before the parent.
- The parent still loses a significant degree of control. If the parent sells the property, the proceeds belong to the parent and the child (remaindermen), split according to the percentage of ownership determined by IRS life-expectancy tables.
- Capital gain tax would be owed by the child on his or her gains.
- If the parent retains a life estate and the property is not sold before the parent dies, then under current law there would be no capital gain at the time of death because its cost basis is “stepped up” to the property’s market value on the date of death. This is a good thing for the recipient !
- For Medicaid, the parent is deemed to own the entire interest in the real estate for five years after a deed execution retaining a life estate. They will also be the owner of the life estate interest thereafter, the value of which is calculated at the time of application for Medicaid.
- RE: inheritance tax, the date-of-death value is taxable to the child – not lovely. But, the child gets a step-up in cost basis (easier if inherited at death in my opinion).
#4, Will the property.
- Call the lawyer. Ok, now, plan for the child to do back flips on how much taxes you just saved him/her/them.
#5, The ‘entity’ approach.
- The nuances will require coordinated input from your lawyer, CPA/ accountant, insurance agent, with some feedback from a real estate broker and your banker.
- The when/ how to transfer should involve your accountant, lawyer, insurance agent, banker/lender at a minimum.
As I’ve told clients for decades: “You’re not dealing with a candy bar.”