Should I Give My Kid the House Now or Leave It to Him in My Will or Trust?

Transferring your house to your children while you’re alive may avoid probate, the court process that otherwise follows death. However, gifting a home also can result in a big, unnecessary tax burden and put your house at risk, if your children are sued or file for bankruptcy.

Further, you also could be making a big mistake, if you hope it will help keep the house from being used for your nursing home bills.

MarketWatch’s recent article entitled “Why you shouldn’t give your house to your adult children” advises that there are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since passed away.

If you bequeath a house to your children so that they get it after your death, they get a “step-up in tax basis.” All the appreciation that occurred while the parent owned the house is never taxed. However, when a parent gives an adult child a house, it can be a tax nightmare for the recipient. For example, if the mother paid $16,000 for her home in 1976, and the current market value is $200,000, none of that gain would be taxable, if the son inherited the house.

Families who see this mistake in time can undo the damage, by gifting the house back to the parent.

Sometimes people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the poor. However, any gifts or transfers made within five years of applying for the program can result in a penalty period, when seniors are disqualified from receiving benefits.

In addition, giving your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be sold and divided in a property settlement.

However, Tax Code says that if the parent retains a “life interest” or “life estate” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift.

There are specific rules for what qualifies as a life interest, including the power to determine what happens to the property and liability for its bills. To make certain, a child, as executor of his mother’s estate, could file a gift tax return on her behalf to show that he was given a “remainder interest,” or the right to inherit when his mother’s life interest expired at her death.

There are smarter ways to transfer a house. There are other ways around probate. Many states and DC permit “transfer on death” deeds that let people leave their homes to beneficiaries without having to go through probate. Another option is a living trust. Properly set up it will be creditor and divorce protected for the child instead of an outright transfer.

To find out more about what would be the appropriate strategy to use, contact my office to set up a consultation. We can do it in person or virtually through Zoom if you are more comfortable using that method.

Reference: MarketWatch (April 16, 2020) “Why you shouldn’t give your house to your adult children”

 

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Steps to Take When a Loved One Dies

This year, more families than usual are finding themselves grappling with the challenge of managing the affairs of a loved one who has died. Handling these tasks while mourning is hard, and often families do not have time to prepare, says the article “How to manage a loved one’s finances after they die” from Business Insider. The following are some tips to help get through this difficult time.

Someone has to be in charge. If there is a will or trust, there should be a person named who is responsible for administering the estate, usually called the executor or personal representative in the will or trustee with a trust. If there is no will or trust, it will be best if one person has the necessary skills to take the lead as they will have to be appointed by the court.

When one member of a married couple dies, the surviving spouse is the usual choice. Otherwise, a family member who lives closest to the deceased is the next best choice. That person will need to get documents from the local court and take care of the residence until it is sold. Being physically nearby can make many tasks easier.

It is always better if these decisions are made before the person dies. Wills and/or trusts should be kept up to date, as should power of attorney documents, trusts and advance directives. When naming an executor or trustee, let them know what you are asking of them. For instance, don’t name someone who hates pets and children to be your children’s guardian or be responsible for your beloved dogs when you die.

Don’t delay. Grief is a powerful emotion, especially if the death was unexpected. It may be hard to get through the regular tasks of your day, never mind the additional work of managing an estate. However, there are risks to delaying, including becoming a target of scammers.

Get more death certificates than seems necessary. Make your life easier by getting at least a dozen certified copies, so you don’t have to keep going back to the source. Banks, brokerage houses, phone companies, utilities, credit card companies, etc., will all want to see the death certificate. While there are instances where a copy will be accepted, in many cases you will need an original, with a raised seal. In fact, in some states it is a crime to photocopy a death certificate.

Who to notify? The first call needs to be to the Social Security Administration. You may also want to send an email. If Social Security benefits continue to be paid, returning the money can turn into a time-consuming ordeal. If there are any other recurring payments, like VA benefits or a pension, those institutions need to be notified. The same is true when it comes to insurance companies, banks and credit card companies. Fraud on the credit cards of the deceased is quite common. When a notice of death is published, criminals look for the person’s credit card and Social Security numbers on the dark web. Act fast to prevent fraud.

Protect the physical property. Secure the home right away. Are there plants to be watered or pets that need care? Take pictures, create an inventory and consider changing locks. Take any valuables out of the house and place in a secure location. If the house is going to be empty, make sure to take care of the property to avoid any deterioration.

Paying the bills. Depending on the person’s level of organization, you’ll have to identify where the money is and if anything is being paid automatically. Old tax returns can be helpful to identify income sources. Figure out what accounts need payment, like utilities.

Some accounts are distributed directly to beneficiaries, like transfer-on-death accounts like 401(k)s, IRAs and life insurance policies. Joint bank accounts and real property held in joint tenancy will pass directly to the joint owner. The executor’s role is to inform the institutions of the death, but not to distribute funds.

File tax returns. You’ll have to do the final taxes, due on April 15 of the year after death. If taxes weren’t filed for any prior years, the executor has to do those as well.

Consider getting help. An estate planning lawyer can help with the administration of an estate, if it becomes overwhelming. Regardless of who handles this process, expect the tasks to take anywhere from six months to two years, depending on the complexity of the estate.

Reference: Business Insider (May 2, 2020) “How to manage a loved one’s finances after they die”

 

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How to Keep the Family Vacation Home in the Family

If this winter-like weather plus pandemic have left you wondering about how to get started on passing the family vacation home to the family or preparing to sell it in the future, you’ll need to understand how property is transferred. The details are shared in a useful article titled “Exit strategy for keeping the cabin in the family” from The Spokesman Review.

Two options to consider: an outright sale to the adult children or placing the cabin in a qualified personal residence trust. Selling the vacation home and renting it back from the children, is one way that parents can keep it in the family, enjoy it without owning it, and help the children out with rental income.

One thing to bear in mind: the sale of the vacation home will not escape a capital gains tax. It’s likely that the vacation home has appreciated in value, especially if you’ve owned it for a long time. If you have made capital improvements over that time period, you may be able to offset the capital gains.

The actual gain is the difference between the adjusted sales price (that is, the selling price minus selling expenses) and their adjusted basis. What is the adjusted basis? That is the original cost, plus capital improvements. These are the improvements to the property with a useful life of more than one year and that increase the value of the property or extend its life. A new roof, a new deck, a remodeled kitchen or basement or finished basement are examples of what are considered capital improvements. New curtains or furniture are not.

Distinguishing the difference between a capital improvement and a maintenance cost is not always easy. An estate planning attorney can help you clarify this, as you plan for the transfer of the property.

Another way to transfer the property is with the use of a qualified personal residence trust (QPRT). In this situation, the vacation home is considered a second residence, and is placed within the trust for a specific time period. You decide what the amount of time would be and continue to enjoy the vacation home during that time. Typical time periods are ten or fifteen years. If you live beyond the time of the trust, then the vacation home passes to the children and your estate is reduced by the value of the vacation home. If you should die during the term of the trust, the vacation home reverts back to your estate, as if no trust had been set up.

A QPRT works for families who want to reduce the size of their estate and have a property they pass along to the next generation, but the hard part is determining the parent’s life expectancy. The longer the terms of the trust, the more estate taxes are saved. However, if the parents die earlier than anticipated, benefits are minimized.

The question for families considering the sale of their vacation home to the children, is whether the children can afford to maintain the property. One option for the children might be to rent out the property, until they are able to carry it on their own. However, that opens a lot of different issues. They should do so for period of one year at a time, so they receive the tax benefits of rental property, including depreciation.

Talk with a qualified estate planning attorney about what solution works best for your estate plan and your family’s future. There are other means of conveying the property, in addition to the two mentioned above, and every situation is different. Our office is fully open during this present situation and I am offering appointments both in person and virtually to cover any estate planning issues you may have.

Reference: The Spokesman Review (April 19, 2020) “Exit strategy for keeping the cabin in the family”

 

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