When you are considering the question of moving out of your house in your retirement years, a common follow-up question is whether you should transfer the title of your primary house to your adult children by gift. There are a number of myths and “my neighbor did it” reasons which cause homeowners to unfortunately make a knee-jerk decision on this important issue. There is no one answer that fits all. Here are some legal and tax issues which will be relevant to consider prior to gifting your home to your adult children:
1. Gift Tax
Federal gift taxes may be incurred when a U.S. person makes a gift values at $14,000 (in 2016) to the recipient. For example, if there are two (2) donors (let’s say the parents of a family) and a child who is married, the donor couple may gift up to $56,000 worth of assets to the child and spouse without any gift taxes or filing a gift tax return. This amount is determined based on the fair market value on the date of the gift and not the purchase price. Therefore, even if you might have purchased the residence for $50,000 in 1968, you cannot use that purchase price to determine gift exemption. You need to use the value on the date of the gift. Such value may require an appraisal for gift tax return filing purposes or at least a consultation with your local realtor to get an idea of the approximate market value prior to making a final decision on whether you should gift or not.
2. Loss of Step-Up in Basis Opportunity at Death
If your children receive your home as part of your estate (upon your death) instead of a lifetime gift from you, the residence will most likely qualify for a step-up in the basis used to determine the capital gain if your children decide to sell the home either shortly after your death or much later. If you gift the home during your lifetime, your children will inherit your basis and will not be able to step-up the value upon your death at the time they decide to sell. For a home which might have a substantial gain, this issue should be considered carefully with your tax advisors (i.e. estate tax planning attorney or your certified public accountant).
3. Your Children’s Liabilities
Most parents gift their homes to their adult children to see their longstanding home “passed on” through the generations. One issue to consider is whether your children would be at risk of losing the home to his or her creditors if their own assets are unable to meet their potential debts. Another issue to consider is that if the child has a failed marriage, the (parents’) home could be subject to division during a divorce if the asset was commingled during the child’s marriage.
In additional to legal and tax issues, there are a number of family and other estate planning factors to consider. For example, if you have more than one child, would your other children be given a right to buy the home? Or, what if there is more than one child who wants the home? If you gift the house to one child, would that gift be accounted for at your death since it may reduce the amount available for the rest of your children? There are many more estate planning issues which would be important to discuss with your estate planning advisors to help you consider the best course for your specific family situation.
As an estate attorney, I can help you with the planning it takes to make smooth transitions and avoid costly mistakes. Visit our us at http://www.ChangLawGroup.com, give me a call at 425-605-1234 or send me an email at firstname.lastname@example.org.