- For Attorneys
Many parents wish to transfer real estate to their children during their lifetime to avoid probate proceedings at their death or because they want the children to have the use of the property during the parents’ lifetime. However, the step-up basis issue is often overlooked. If the parents transfer the property during the parents’ lifetime without remaining on the title as a joint owner, then the children receive the property with the same tax basis that the parents had in the property. The tax basis is generally what the parents paid for the property plus any capital improvements to the property, which is typically much lower than the property’s fair market value. If the child eventually sells the property, the child may pay a large capital gains on the difference between the fair market value at the time of sale over the amount of the parents’ tax basis.
However, if instead of a present transfer of all ownership to the children, the parents deed the property to the child and the parents as joint tenants with rights of survivorship, then when the parents die, the child will inherit the property outside of probate and the child's basis in the property will be the fair market value of the property at the parents’ death. This is referred to as a stepped-up basis. Property owned as joint tenants with a right of survivorship transfers outside of probate and the survivng owners automatically inherit the share of the deceased joint tenant. If the child then later sells the property, the capital gains owed will only be the extent of any appreciation in the property after the date of the parents’ death rather than paying capital gains on the amount equal to the fair market value at the date of sale over the amount of the parents’ original cost basis.
Inheritance taxes are taxes levied on the value of an estate when it is passed to heirs upon the death of its owner. They do not apply to transfers made while the owner is alive.
Any transfer to an individual, either directly or indirectly, where fair market value is not received in return is considered a gift. The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not federally taxable gifts:
-Gifts that are not more than the annual exclusion for the calendar year.
-Tuition or medical expenses you pay for someone (the educational and medical exclusions).
-Gifts to your spouse.
-Gifts to a political organization for its use.
The current federal annual exclusion is $13,000 for individual gifts or $26,000 for gifts by spouses. However, the gift tax will not apply until you give away $1,000,000 in your lifetime.
A quirt claim deed transfers the property without any warranties of title. Therefore, there may be liens and other claims on the property that would be transferred with the property. If the father is seeking to divest himself of the property to keep it from Medicaid claims, there is a 5 year lookback period for including transfers made during this time in the estate. Before you qualify for the government nursing home assistance program, there is a 60 month look back to see if and when you transferred your assets for less than fair cash value or you transferred your assets into a trust system or any system of transferring your wealth for the purpose of becoming eligible for the nursing home program depriving the state of all your available resources for your long-term health care.
Transferring, giving away or selling resources for less than fair market value is called a "disposal of resources". Under the Deficit Reduction Act of 2005, the look back period (five years rather than three) will apply to transfers made on or after February 8, 2006. For every $4300 disposed of you will be disqualified for one month of Medical Assistance coverage of your nursing home care.
Transferring a house to the following people does not affect eligibility for Medicaid:
-A child under the age of twenty-one or a child who is certified blind or certified disabled at any age
-A sibling with an equity interest in the home who has resided in the home at least one year immediately prior to the date the patient became institutionalized and continues to lawfully reside in the home.
-A caretaker child who has resided in the home for at least two years immediately prior to the date the patient became institutionalized and who provided care.
If a person's equity interest in the home is $500,000 or less (or $750,000 or less in some cases) and the person intends on returning home, it will not be considered as a resource in determining eligibility for Medicaid. The equity value is derived by subtracting encumbrances such as liens and mortgages from the fair market value. Reverse mortgages and home equity loans can be used to reduce the equity interest.
Creating a life estate without the power to sell the house is a disposal of a resource that may disqualify you from Medical Assistance. If a life estate deed without the power to sell was created long enough ago that there is no penalty, the house is a countable resource, but your life estate without the power to sell has a market value of $0, so it would not disqualify you from Medical Assistance.
Creating a life estate deed with the power to sell the house is not a disposal, because you still have the power to sell the house at any time without anyone else's permission. However, the house could not be an exempt resource based only on your saying you intend to return home, because the State cannot put a lien on a house owned this way. The market value of the house would be counted as an available resource. If the house would be exempt for other reasons, such as because your spouse or a dependent relative lives in it, then it still would be exempt.
The answer will depend on all the factors in the situation, such as, among others, the purchase amount you are to pay, if any, whether creditors are being avoided, and the value of the property. I suggest you consult a local estate planning attorney who can review all the facts and documents involved.