Many seniors are thinking they can avoid probate, reduce their estate and directly give their home to their children. This can be done, BUT!!... giving away your residence can have major tax consequences, among other possible estate problems if it is not transferred properly!
When you transfer property valued at more than $13,000 in any one year, you are subject to having to pay a gift tax (currently 35%). However, current federal law states you can gift a total of $5 million over your lifetime without incurring a gift tax (but you must file an IRS Form 709 Gift Tax Return to document the gift). This means that if your home is worth less than $5 million, you will not likely have to pay gift taxes, however, you will have to file a gift tax form. Understand that we are expecting Congress to change the gift tax exemption, which is now scheduled to revert to $1 million at the end of 2012 unless Congress acts to do something different.
As part of your lifetime gift tax allowance, you and your children may not have to pay gift taxes on this gift. However, if your children sell the house right away, they may be facing another kind of tax, capital gains taxes. When you give away your property, the tax basis (typically the original cost plus improvements) of the property for the person gifting the property becomes the tax basis for the child receiving the property. For example, suppose you bought the house many years ago for $20,000 and now the house is estimated to be worth $400,000. If you give your house to your children, their tax basis will be $20,000. If your children sell the house right away, the capital gains taxes will be on the difference between $20,000 and your basis. To minimize capital gains tax, your children must live in the house for at least two years (out of the last 5 years) before selling it. This way, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes. Any amounts above the personal residence credit will be taxed currently at 15% Federal Capital Gains Tax, and 10.33% California Tax.
It is important to understand that inherited properties (bequeathed to a person and transferred after death) does not face the same tax situation as pre-death gifted properties. If your children were to inherit your home, the tax basis would be "stepped up," which means the basis would be stepped up to the current value of the property at the time of your death. If the house is sold, the new basis will be the value of the property at the time of your death, eliminating or minimizing capital gains tax. However, this may not be the best solution for the asset protection. If your home remains in your estate and you use Medi-CAL (Medicaid), Medi-CAL Recovery Department recover their costs against the property upon the death of the surviving spouse, if the property was in the name of the spouse at that time.
There are other options for giving your house to your children, including transferring it into an Irrevocable Trust, or outright gifting accompanied by a Lifetime Occupancy Agreement, which can save your home from recovery and if written correctly, still be considered an inheritance when you (and your spouse) pass away, getting the step up in basis. So, before you gift your family home, please talk to an elder law attorney, who can advise you on the best method for asset protection and making sure your home to properly transferred to your children!
LA LAW Asset Protection / Elder Law Attorneys offer free consultations to help you understand your options for saving your family home in regards to taxes and Medi-CAL recovery.
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