We have had many questions about parents who have previously gifted real estate to their children, as well as forward planning parents who want to give a gift of real estate to their children. Without proper planning and counseling, this will often cause tax and other problems that could outweigh the parent’s generosity towards their children.
Gifts come in many packages, but usually with real estate a gift will take the form of: a) an outright transfer of ownership of the property; b) adding the name of the child onto the title of real property; or c) deferring the gift until death through the use of a will, trust or life estate deed.
Some of the gifting goals that are expressed to us by parents are: to avoid probate; to allow children to have some current management control over the property (for example, as a caregiver or financial manager for the parent); to allow one of the children to control the disposition of the property in case of incapacity or death; to protect the asset from the parent’s creditors; to qualify parents for Medicaid assistance for nursing home care, etc.
Why is such a generous “deed” a problem? Usually because of unintended consequences. When a gift of real estate is made to children, one or more of the following often occurs:
- The value of the gift will almost always need to be reported to the IRS on a gift tax return (this is frequently overlooked, but just because Bubba your golfing buddy didn’t do it, that doesn’t mean the failure to file a required tax return is something you should also take the risk of).
- The tax basis of the real estate in your children’s hands will be the same as your basis prior to the gift, which means that when your children sell the property, they will have to pay tax on the capital gains from the property (alternatively, a gift after death gets a step up in basis which would lessen the tax on any capital gains on resale).
- By adding children onto the title (gifting them ownership) you would be opening up the property to claims of the creditors and predators of the children, even if that property is your Homestead.
- With children as co-owners of your Homestead, the property tax benefits and exemptions afforded to Homestead in Florida could be reduced, and possibly eliminated.
- If a child is added on to title with a right of survivorship, any other children or beneficiaries would be cut off from inheriting that property (most people assume that the inheriting child would share the property or its proceeds with all other children, but there is no legal obligation of the inheriting child to do so and frequently the child will justify taking the full value because of the caregiving services, financial oversight, promises made during lifetime and many other reasons which may or may not be true).
- Multiple children owners will need to figure out how to manage and/or dispose of the property, which will often lead to arguments and sibling dysfunctionality;
- A parent’s Homestead property is usually an asset that is exempt from Medicaid qualification, and therefore in most cases should be retained rather than gifted away.
The bottom line is that any time someone suggests gifting or adding a child onto the title of real property, and especially their Homestead property, they should immediately be advised to discuss that transfer with a competent estate and real estate planning attorney.
Berlin Patten Ebling, PLLC
Article Authored by Chris Caswell, Esq. firstname.lastname@example.org
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