How Do You Gift Your House to Your Children during Your Lifetime?

Whether you have a split level or a log cabin, your estate plan should be considered when passing property along to the next generation. How you structure the transaction has legal and tax implications, explains the article “How estate planning can help you pass down a house to your kids and give them a financial leg up” from USA Today.

For one family, which had been rental property landlords for more than two decades, parents set up a revocable trust and directed the trustee to be responsible for liquidating houses only when they became vacant, otherwise maintaining them as rental properties as long as tenants were in good standing. They did this when the wife was pregnant with their first child, with the goal to maximize the value to their children as beneficiaries. This was a long-term strategy.

Taxes must always be considered. When a home or any capital asset is given to children while the parents are alive, there may be a capital gains tax issue. It’s possible for the carryover cost basis to lead to a big cost. However, using a revocable trust avoids probate and gives them a step-up in basis to avoid capital gains taxes.

Many families use a traditional method: gifting the house to the children. The parents retain the ownership and benefit of the property during their lifetimes. When the last parent dies, the children get the home and the benefit of the stepped-up basis. However, many estate planning attorneys prefer to have a house pass to the next generation through a revocable trust. It not only avoids probate but having a trust allows the parents to dictate exactly what is to be done with the house. For example, the trust can be used to direct what happens if only one child wants the house. The one who wants the house can have it, but not without buying out the other children’s’ shares.

If the children are added onto the deed of the house, keep in mind whoever is added to the deed has all the rights and liabilities of an owner. If one child wants to live in the home and the others don’t, the others won’t be able to sell the house. The revocable trust mentioned above provides more control.

Selling the family home to an adult child may work, especially if the parents cannot afford to maintain the home and the child can. However, there are pitfalls here, since the parents lose control of the home. An alternative might be to deed the property to the children, have the children refinance the property and cash the parents out.

If parents sell the home below fair market value, they are giving up proceeds to finance their retirement. If they don’t need the money, great, but if not, this is a bad financial move. There are also taxable gains consequences, if the home is sold for more than they paid. A home’s sale might result in a dramatic increase in property taxes to the buyer.

However you decide to pass the family home or other real estate property to children, the transfer needs to be aligned with the rest of your estate plan to avoid any unexpected costs or complications. Your estate planning attorney will be able to help determine the best way to do this, for now and for the future.

Reference: USA Today (Dec. 3, 2021) “How estate planning can help you pass down a house to your kids and give them a financial leg up”

 

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Prince Philip’s Will: Are Royals Different than Regular People?

There’s a royal battle brewing over Prince Philip’s will, but it’s not what you might expect. The lawsuit isn’t being brought by a creditor or even a potential beneficiary of the estate, A major United Kingdom newspaper, The Guardian, has instead announced that it’s taking legal action. This is according to a recent article titled “The Legal Battle Over Prince Philip’s Will” from Wealth Management.

The newspaper is arguing that the press should be allowed to attend the hearing for the will and claims that doing so constitutes a serious interference with principle of open justice. In other words, the Royal Family is a public family, funded by the public and the public is entitled to know what’s in the will.

A hearing was held in September concerning keeping the will sealed for 90 years, and the press was neither notified nor invited. The only people in attendance were Prince Philip’s estate attorney and an Attorney General. The court’s position is that the presence of the Attorney General represented the people.

British law is similar to American law, when it comes to making wills public. Once the will goes into probate, following the death of the person, it’s a public document. This is why estate planning attorneys recommend using trusts, which remain private and allow assets to pass outside of the probate process. It’s also why certain information should never be in a will, like financial account titles and numbers.

The idea of sealing a will is an exception under rare circumstances, and in England this has to date only been done for the royal family. The president of the family division of the high court ruled that these exceptions are necessary to enhance the protection of the royal’s private lives and the dignity of the sovereign and other close family members.

There have been many attempts to challenge the privacy of royal wills. So far, none has been successful.

The question posed by this lawsuit concerning the public’s right to know is not a new one. However, it will be interesting to watch in a day and age when royalty and the role of the royal family is under severe scrutiny.

The royal family is funded by taxpayers, who routinely question how much privacy should be permitted when the money comes from their pockets. Whether such special rules are really needed to protect the “integrity” of the royals has been an on-going debate in the U.K.

In the United States, high-net worth and high-visibility individuals and families use trusts and other methods to maximize their privacy. Even “regular” indivuduals use trusts to convey assets to their heirs.

Reference: Wealth Management (Dec. 1, 2021) “The Legal Battle Over Prince Philip’s Will”

 

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Can I Restructure Assets to Qualify for Medicaid?

Some people believe that Medicaid is only for poor and low-income seniors. However, with proper and thoughtful estate planning and the help of an attorney who specializes in Medicaid planning, all but the very wealthiest people can often qualify for program benefits.

Kiplinger’s recent article entitled “How to Restructure Your Assets to Qualify for Medicaid says that unlike Medicare, Medicaid isn’t a federally run program. Operating within broad federal guidelines, each state determines its own Medicaid eligibility criteria, eligible coverage groups, services covered, administrative and operating procedures and payment levels.

The Medicaid program covers long-term nursing home care costs and many home health care costs, which are not covered by Medicare. If your income exceeds your state’s Medicaid eligibility threshold, there are two commonly used trusts that can be used to divert excess income to maintain your program eligibility.

Qualified Income Trusts (QITs): Also known as a “Miller trust,” this is an irrevocable trust into which your income is placed and then controlled by a trustee. The restrictions are tight on what the income placed in the trust can be used for (e.g., both a personal and if applicable a spousal “needs allowance,” as well as any medical care costs, including the cost of private health insurance premiums). However, due to the fact that the funds are legally owned by the trust (not you individually), they no longer count against your Medicaid income eligibility.

Pooled Income Trusts: Like a QIT, these are irrevocable trusts into which your “surplus income” can be placed to maintain Medicaid eligibility. To take advantage of this type of trust, you must qualify as disabled. Your income is pooled together with the income of others and managed by a non-profit charitable organization that acts as trustee and makes monthly disbursements to pay expenses on behalf of the individuals for whom the trust was made. Any funds remaining in the trust at your death are used to help other disabled individuals in the trust.

These income trusts are designed to create a legal pathway to Medicaid eligibility for those with too much income to qualify for assistance, but not enough wealth to pay for the rising cost of much-needed care. Like income limitations, the Medicaid “asset test” is complicated and varies from state to state. Generally, your home’s value (up to a maximum amount) is exempt, provided you still live there or intend to return. Otherwise, most states require you to spend down other assets to around $2,000/person ($4,000/married couple) to qualify.

Reference: Kiplinger (Nov. 7, 2021) “How to Restructure Your Assets to Qualify for Medicaid”

 

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