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One of your most financially significant assets may be your home. There are heavy tax implications when thinking about giving your home over to your children but there are ways to transfer your home to your children without tax consequences. Read on to learn about the possibilities.
Problems with Life Estates
A life estate involves a contract giving a child partial ownership of the property while you have the right to live there until you die. There are many potential problems with this type of arrangement.
Tax Exclusion
In a life estate agreement, if you agree with your child to sell the house, you could pay capital gains taxes on the amount your house has increased in value over the years. This happens because when you do not live in your house for 2 of the last 5 years, the Federal tax laws remove your “Principle Residence Tax Exclusion.” This issue could cost thousands depending on where you live and how long you have lived there.
Medicaid Issues
Another complication of a life estate is that if you transfer your home or assets during the 5 years before applying for Medicaid help, the state may declare you ineligible for benefits. According to TX Medicaid Law, “the state may “look back” up to 60 months before you applied for nursing home, ICF/IID or waiver services to determine when your income was reduced and resources were transferred.”
Liens
If you arrange a life estate with your child, their share in the house could eventually belong to a lien holder. This situation might apply if your child owes taxes, goes into bankruptcy, gets a divorce, or is sued. In these situations, the equity in your home is in danger of belonging to someone else.
Loss of Rights
Your child could refuse to make repairs on your home or to let you sell the home if you choose to move. Keeping sole ownership of your home gives you rights that you do not have with joint ownership.
Leave Property in Your Will
No Tax Penalties
Leaving your home in your will allows you to give up to $11.58 million per individual without tax penalties (in 2020). A tax benefit called “stepping up the basis” means that the heir does not pay capital gains taxes on the amount your house has increased in value over the years. They only pay taxes if the basis (the value of the house) increases while they own the property.
No Probate Court
Leaving your house in your will is also a good idea because it will pass immediately to your beneficiaries upon your death. Your heirs avoid probate and the expenses involved. According to TX law, you can draw up a “Transfer on Death Deed” naming a beneficiary to own that real property after you die and it will not need to go through probate court.
Trusts
Living Revocable Trust
A living revocable trust will allow you to give control of your estate over to a legal entity called the trust. Whoever you declare as the trustee actually manages the property and assets while you are alive. When you pass away, the trustee you name passes on the property and assets to the beneficiaries. Taxes are paid by the trust while alive and by the heirs once you pass.
Irrevocable Trust
An irrevocable living trust is permanent. Once property is placed into this kind of trust, you can’t take it out without everyone named in the trust agreeing and signing off on it. Taxes are paid by the trust while alive and by the heirs once you pass.
Trusts can be more expensive to set up, but may be worth the extra cost. Even though you do not own your property anymore with a revocable trust, you still retain control, especially when you name yourself as trustee. It is wise to consult a knowledgeable attorney to set up a trust.
Lady Bird Deeds
According to texaslawhelp.org, “Lady Bird Deeds are often used in long-term care planning. It gives you the right to live in, sell, or mortgage the property while you’re alive and gives the beneficiaries on the deed the right to receive the property (if you still own it) when you die. The transfer is contingent on whether you still own the property.”
Seek Counsel
The opinion and advice of a trustworthy and knowledgeable real estate attorney will give you peace of mind as you work through how best to leave your home to your child. Because tax laws constantly change and estate laws may not be easily understood, working with an attorney who knows all of the recent tax and estate laws will give you the best outcome.