By CD Moriarty
We are a couple in our 80s who have been retired since 1996. We have two children who are residing in two of our houses. We would like to know when we should initiate a transfer of the titles to the children that would be tax-advantageous to them.
You are generous to your children, but since the houses are being used by them already, what is the rush is to get the titles into their name?
Your focus on their taxes sounds like a noble reason, but what about what works best for you as a couple? Your financial situation, estate and familial relationships hold the key.
The essential factor is the value of your total assets, then your federal and state estate tax situation and how your will, and trust if you have one, are written. Then there’s Medicaid eligibility rules as well as gift and inheritance tax issues.
Without knowing all your financial details and the state you live in, I can only give you a broad overview of issues to consider. I urge you to consult your accountant, attorney or other adviser.
It’s critical to speak to your children. You want to be clear about what you are giving and why. Most of all, explain the bigger picture and what will be the outcome as inheritance. More than 80% of parents are not transparent with their families about their finances, according to one study .
Without clarity and understanding, your adult children may be confused, expect a larger inheritance or worry about you and your spouse unnecessarily.
What to consider
Before you act, think about yourselves. Evaluate whether you have enough to take care of you both for the rest of your lives.
According to life expectancy tables , the average 80-year-old could live another seven to nine years; however, that does not consider lifestyle, health issues and quality of life. Most financial planners are doing financial projections until age 95 or 100, which strikes me as prudent as people live longer.
Your gifting could affect qualifying for Medicaid. Almost all states have a look-back period of 60-month, though in some states it is shorter. This is to make sure you haven’t gifted assets or sold them below market value in order to qualify for everything from free or reduced rate in-home care to nursing-home payments. Understand your state’s rules before your make a title change.
Even if Medicaid is not an issue, be realistic about the cost of additional home care, assisted living or nursing facilities. Keeping the homes may in the long run give you more resources to pay for that care, if needed.
On the relationship side, ponder these questions:
What is your goal with your children? To help them financially? Make them self-sufficient?
How will this impact your other children, if you have any? Or impact each child if these homes are not of equal value?
How would you feel if one or both sold their home before you die?
What other financial gifts are you giving your children?
Financial decisions affect family relationships. Remember that once the property is titled in their name, your adult child can do anything with it. Think about how watching their decision-making could affect you.
It’s essential to communicate your expectations. I witnessed a young couple sell a home that was gifted to them by my client. The couple then bought a bigger home and asked the parents to contribute financially to this new property so they could improve it. This left the parents in frustrated and unable to say no. However, the young adults could not manage the added expenses of a bigger home and were plagued with debt. The parents were filled with disappointment.
How to transfer property
If your goal is to save your children money on taxes, then the best course typically is to wait until you die and let them inherit the homes. They will acquire ownership at the home’s market value at the time of your death, rather than gifting now, when their cost basis will begin with the price when you purchased the home. This is important for calculating capital gains whenever they sell.
Under today’s rules – which adjust for inflation and sometimes get reduced by legislation – you can pass on $12.06 million ($24.12 million for a couple) free of federal estate taxes.
The value of the home will be “stepped up” upon death and will become the starting point (the “cost basis” to the IRS) for calculating any capital-gains taxes whenever they do sell.
Even if your estate is far below the federal tax-free limits, your estate and gifting may be subject to state taxes . Eleven states have an estate tax, and they start as low as $1 million; five levy an inheritance tax.
If you want to gift the houses all at once before you die, it may still be gifted tax-free, but you will need to file IRS form 709 for the tax year of the title transfer. The amount you gift will be reduced from your tax-free limit for estate taxes when you die.
Keep in mind that this form is required whenever you gift more than $16,000 (2022 limits) to one person in a year.
There are many ways to transfer a title besides all at once. There are real estate trust options guaranteeing the transfer at your death. For example, by setting up a revocable trust to benefit your child and putting the specific property into now, you will guarantee they receive the property they live in. It also allows you to retain control of the property should you need to sell, get a loan or charge rent to cover medical care as you age.
Another example, some parents transfer a title over time. As a couple, you could transfer up to $32,000 a year to each child ($16,000 from each of you) or $64,000 if you also made a similar gift to the partner or spouse. Again, these are 2022 limits.
This approach gives you more flexibility overall for your estate planning. You can do this with any asset, and your decision does not have to be all or nothing.
To transfer the title in a home over time, the title will need to be changed each time you gift and must be noted with government record-keepers where the property is located. Please consult legal advice to be sure this happens correctly.
Finally, be sure to consult your lawyer about the impact on your estate and any changes that will be needed to your will and other documents. Talk to your accountant to make sure you comply with tax laws.
Then make the best decision for the two of you.
<EMPHASIS>CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at <INTERNET LOCATION="EXTERNAL" URL="https://www.moneypeace.com/">MoneyPeace</INTERNET>.</EMPHASIS>
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