Aaron Charles Gregg

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

“There are many ways to pass property on to children, including gifting the family home to them while you are still alive, bequeathing it to the children upon your passing, or selling the residence to your heirs.”

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”

Should You Put Your House in Your Child’s Name?

“In a nutshell, it might be better for your mom to put the home in a living trust that allows her to control the home while she is alive and allows you to inherit the home through the trust upon her death.”

One of the ways families build wealth across generations is through home ownership. Parents who can afford to give a property to children who either sell the home and distribute profits or keep it in the family have a definite advantage over generations of renters. How to transfer the home is not always straightforward. A recent article from The Washington Post titled “Don’t put your kids on the title of your home. There’s a better way for them to inherit the property” explains how to do this.

In this article, the mother placed an adult child on the deed to a home purchased some five years ago. The mom wants to sell the house and buy a smaller one nearby. The adult child has never lived in the home. The mother wants to do an 80/20 split of profits from the sale, with the child receiving the majority amount. This would push the child into a higher tax bracket, although the child says she could use the income.

The mother, despite her good will, has made a classic estate planning mistake. Was she trying to avoid probate at death, or to give the child some or all of the property?

As the homeowner, the mother may exclude the first $250,000 in profits from federal income taxes, if she was the sole owner. If she were married, that number would be up to $500,000. However, she’s not the sole owner.

When a person dies, heirs inherit real estate at its current market value. If the home was purchased for $100,000 and its worth is $500,000 when the owner dies, a child who inherits the home outright and then sells it immediately will receive about $400,000 in profits. If the house was inherited after death and then sold shortly thereafter, the IRS would say the property value is $500,000.

If someone inherits a home worth $500,000 and then sells it for $500,000, there is no profit because of the stepped-up value of the home assigned at the time of the owner’s death. However, if the estate in total is worth less than $11.7 million, estate taxes are not a concern.

Here’s the twist: if the mother and child are co-owners of the home and the mother dies, the child inherits only one-half the value of the home (and receives the stepped-up basis for the half but won’t benefit from the stepped-up basis) If the child sells the home, they won’t pay taxes on the share inherited from the mother but would pay taxes on the child’s share of the home.

If the mom bought the house for $100,000 and the mother and child are co-owners, the child would inherit the mother’s half of the property at the stepped-up basis of $500,000. When the home was sold, the mother’s half is shielded from taxes, but the child’s profit is calculated based on the difference between the purchase and sales price, or $400,000, of which their share is $200,000. They would owe taxes on the $200,000, instead of inheriting the home tax-free.

There are many estate planning and real estate tax rules making this more complicated. However, one better alternative is for the mom to put the home in a living trust, so she controls the home while she is alive, and the child can inherit the home through the trust upon her death. Talk with an estate planning attorney about how to create a living trust and how it would work to benefit both of you.

Reference: The Washington Post (Oct. 20, 2021) “Don’t put your kids on the title of your home. There’s a better way for them to inherit the property.”

How Do You Survive Financially after Death of Spouse?

“The death of a spouse is one of the most difficult things imaginable. Besides the emotional toll, surviving spouses typically confront financial issues, which often trigger tax-related questions and consequences.”

The financial issues that arise following the death of a spouse range from the simple—figuring out how to access online bill payment for utilities—to the complex—understanding estate and inheritance taxes. The first year after the death of a spouse is a time when surviving spouses are often fragile and vulnerable. It’s not the time to make any major financial or life decisions, says the article “The Financial Effects of Losing a Spouse” from Yahoo! Finance.

Tax implications following the death of a spouse. A drop in household income often means the surviving spouse needs to withdraw money from retirement accounts. While taxes may be lowered because of the drop in income, withdrawals from IRAs and 401(k)s that are not Roth accounts are taxable. However, less income might mean that the surviving spouse’s income is low enough to qualify for certain tax deductions or credits that otherwise they would not be eligible for.

Surviving spouses eventually have a different filing status. As long as the surviving spouse has not remarried in the year of death of their spouse, they are permitted to file a federal joint tax return. This may be an option for two more years, if there is a dependent child. However, after that, taxes must be filed as a single taxpayer, which means tax rates are not as favorable as they are for a couple filing jointly. The standard deduction is also lowered for a single person.

If the spouse inherits a traditional IRA, the surviving spouse may elect to be designated as the account owner, roll funds into their own retirement account, or be treated as a beneficiary. Which option is chosen will impact both the required minimum distribution (RMD) and the surviving spouse’s taxable income. If the spouse decides to become the designated owner of the original account or rolls the account into their own IRA, they may take RMDs based on their own life expectancy. If they chose the beneficiary route, RMDs are based on the life expectancy of the deceased spouse. Most people opt to roll the IRA into their own IRA or transfer it into an account in their own name.

The surviving spouse receives a stepped-up basis in other inherited property. If the assets are held jointly between spouses, there’s a step up in one half of the basis. However, if the asset was owned solely by the deceased spouse, the step up is 100%. In community property states, the total fair market value of property, including the portion that belongs to the surviving spouse, becomes the basis for the entire property, if at least half of its value is included in the deceased spouse’s gross estate. Your estate planning attorney will help prepare for this beforehand, or help you navigate this issue after the death of a spouse.

It should be noted there is a special rule that helps surviving spouses who wish to sell their home. Up to $250,000 of gain from the sale of a principal residence is tax-free, if certain conditions are met. The exemption increases to $500,000 for married couples filing a joint return, but a surviving spouse who has not remarried may still claim the $500,000 exemption, if the home is sold within two years of the spouses’ passing.

There is an unlimited marital deduction in addition to the current $11.7 million estate tax exemption. If the deceased’s estate is not near that amount, the surviving spouse should file form 706 to elect portability of their deceased spouse’s unused exemption. This protects the surviving spouse if the exemption is lowered, which may happen in the near future. If you don’t file in a timely manner, you’ll lose this exemption, so don’t neglect this task.

Reference: Yahoo! Finance (July 16, 2021) “The Financial Effects of Losing a Spouse”

Inheriting a House? What You Need to Know

“Depending on whether you are the only beneficiary, or you are buying out other beneficiaries, you could move in, rent or sell.”

There are choices when someone inherits a house. However, they depend on several factors. Are there other siblings who also have inherited portions of the ownership of the house? Is there another owner who needs to be bought out? Can the heir afford to take on the responsibilities and expenses of a home? These are all questions presented in the article “What to do when inheriting a house” from The Mercury.

There’s a tax issue to consider, for starters. Property that was titled in the name of the decedent at the time of death and then inherited, receives what is called a “step-up” in basis. This means that there is no federal tax due on the appreciation in value from the time the person purchased the home to the time that the person died.

Let’s say the person bought the home for $100,000 and it’s now worth $300,000. The federal government will not tax the $200,000 difference between the original value and the DOD (Day of Death) value of the home. If the heir obtains an appraisal shortly after the death of the home owner and then moves in or if you already live there and the house is transferred into your name, the “clock” starts running again for another tax break, which is an additional $250,000 exclusion from capital gains on resale after you have lived there for two years.

This all assumes that any other beneficiaries have been satisfied as to the ownership of the house. A good elder law estate attorney will be able to help with the details, including the transfer of title.

Another issue: is there a mortgage on the house? If so, the new owner may need to satisfy the lender and refinance. If the heir has enough money to meet monthly payments, a strong credit rating to be able to get a mortgage and enough income to maintain the home, then it should be a relatively simple transaction.

Have the home inspected before moving in. Is the house in good shape? If repairs need to be done, are they budget-friendly, or will they make the inheritance too expensive to be financially viable?

Property maintenance is another consideration. If the estate can carry costs associated with the property until the property is sold and if the estate can pay for repairs, upgrades and maintenance so the house can be sold for a good price, then that is a reasonable approach to take. If there are other beneficiaries, they should all part of a discussion about how much money is worth investing in the house and what the return on investment will be.

Finally, if the language of the will says “equally to my three children” or language similar to that and one sibling wants to buy out the other two, then an agreement on the value of the house and a plan for working out timing of the sale will need to be created. An estate planning elder law attorney will be able to help create a family settlement agreement that will include an informal accounting, whereby all of the heirs receive their fair share of the inheritance and all sign off that they have agreed to the transaction.

Reference: The Mercury (Jan. 15, 2020) “What to do when inheriting a house”

How Does a Life Estate Work?

“When you use a life estate, how does it work? What are the restrictions and who pays the property taxes and other expenses for the home?”

Life estates are used for a number of estate planning purposes. However, the most frequent strategy is to use a life estate where a parent transfers a home to a child and retains a life estate for themselves.

nj.com’s recent article, “How does a life estate work to transfer a home to a child?” explains that as a result of the transfer, the child becomes the owner of the home but the parent has certain rights and responsibilities.

The most critical right retained with a life estate, is the exclusive right to reside in the property. A child cannot force the parent to move out, and likewise, the child doesn’t have any right to live there. The child can live with their parent, but the deed doesn’t give the child the legal right to live there.

With a life estate, the parent must pay the property taxes and all the regular maintenance connected to the property. In addition, the life tenant is responsible for repairs—but not improvements.

This can be hard to determine, but typically the life tenant must maintain the property in the same condition, as when the life estate deed was signed. Therefore, if the parent moves out, and the property is rented, the parent has the right to receive all of the rents.

When the parent passes away, the life estate automatically ceases and the child now has all of the rights associated with the property.

As far as income tax, when the parent dies, the property receives a “step up” in basis to the date of death value. If the property is sold after the parent dies, the capital gain or loss is calculated by deducting the date of death value from the sales price. It’s a very important tax advantage, if the parent has owned the home for a long time and the property has a low basis.

Retaining the life estate can help the child avoid the capital gains tax more effectively than just transferring the property outright to the child.

However, in contrast, if the property is sold while the parent is still alive, part of the proceeds will be allocated to the parent and part will be allocated to the child.

Only the percentage that’s allocated to the parent will be excluded from income under the federal tax laws. The part that’s allocated to the child may be subject to capital gains taxation.

Every family’s situation is different, so it would be wise to speak with an estate planning attorney to explore whether or not a life estate would be the best situation for you and your family.

Reference: nj.com (July 12, 2019) “How does a life estate work to transfer a home to a child?”