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Tracy
04-26-2004, 10:33 AM
An elderly relative is planning to give her home to one of her
children. This child lives with the homeowner and cares for her, and
all potential heirs agree that this child is entitled to the house.
The state is Alabama. What are the legal implications they should be
concerned about? Neither is willing to consult an attorney - money is
*very* tight, both relevant parties are on a fixed income, and they
are both certain that this is "no big deal." I hope they're right, of
course, but I fear they're being too optimistic. I'm primarily
concerned about taxes, but that's only because I don't know what the
other issues might be. At this point, I believe the owner is planning
to just "sign over" the house to her child, but there is also the
possibility of selling it for a token amount. Any advice would be
welcome.

Stan Brown
04-27-2004, 10:51 AM
"Tracy" <tlbwriter@yahoo.com> wrote in misc.legal.moderated:
An elderly relative is planning to give her home to one of herchildren. This child lives with the homeowner and cares for her, andall potential heirs agree that this child is entitled to the house.

NOW they agree. After the elderly relative's death they might have a
change of heart. It happens in family after family.

The state is Alabama. What are the legal implications they should beconcerned about?

Gift tax is probably the biggie. There are exemptions for gifts from
parent to child, I think: search "gift tax" at www.irs.ustreas.gov .

Since the child is a caregiver, I assume you mean "child" in the
sense of offspring and this is an adult.

Neither is willing to consult an attorney - money is*very* tight

Does "penny wise and pound foolish" mean nothing to them?

If even one potential heir files suit after the aged relative's
death, defending against that will cost many, many times what it
would have cost to get an attorney in now to draw up the transfer.

Also, I think it should be possible to structure the property
transfer to minimize the tax consequences. For example, off the top
of my head, rather than a gift the transfer could be a sale in
exchange for past and future care. (That's just an example; I don't
know enough to say whether it would be a good or bad idea.) Or maybe
it should be an installment sale. Or maybe there should be no
transfer at all now, and the house should be a bequest. Maybe it
makes sense to borrow on the house and give the money to the
caregiver. I have no idea, but I do know that many thousand dollars
are at stake.

An attorney, or at least a tax advisor, would probably save them
many times her fee in taxes.

--
If you e-mail me from a fake address, your fingers will drop off.

I am not a lawyer; this is not legal advice. When you read anything
legal on the net, always verify it on your own, in light of your
particular circumstances. You may also need to consult a lawyer.

Stan Brown, Oak Road Systems, Cortland County, New York, USA
http://OakRoadSystems.com

Christopher Green
04-27-2004, 10:51 AM
tlbwriter@yahoo.com (Tracy) wrote in message
news:<8phq80do6bnlqmgft051rprjvj5kebtk4g@4ax.com>...
An elderly relative is planning to give her home to one of her children. This child lives with the homeowner and cares for her, and all potential heirs agree that this child is entitled to the house. The state is Alabama. What are the legal implications they should be concerned about? Neither is willing to consult an attorney - money is *very* tight, both relevant parties are on a fixed income, and they are both certain that this is "no big deal." I hope they're right, of course, but I fear they're being too optimistic. I'm primarily concerned about taxes, but that's only because I don't know what the other issues might be. At this point, I believe the owner is planning to just "sign over" the house to her child, but there is also the possibility of selling it for a token amount. Any advice would be welcome.

Often the biggest concern in situations like this is Medicaid. If the
elderly homeowner anticipates needing Medicaid-paid long-term care,
any gifts within a 3-year lookback period delay the start of Medicaid
benefits. But if the homeowner wills the house to her child, then goes
on Medicaid, when she dies, Medicaid steps in with a lien, and the
child probably loses the house.

Two common approaches to gaming Medicaid are: (1) give the house to
the child, with a retained life estate: the value of the life estate
reduces the gift value of the house, but Medicaid cannot step in and
claim the remainder; (2) place the house in an irrevocable trust:
Medicaid really doesn't like this and hits this kind of transaction
with a 5-year lookback period.

--
Not a lawyer,

Chris Green

Arthur L. Rubin
04-27-2004, 10:52 AM
Tracy wrote:
An elderly relative is planning to give her home to one of her children. This child lives with the homeowner and cares for her, and all potential heirs agree that this child is entitled to the house. The state is Alabama. What are the legal implications they should be concerned about? Neither is willing to consult an attorney - money is *very* tight, both relevant parties are on a fixed income, and they are both certain that this is "no big deal." I hope they're right, of course, but I fear they're being too optimistic. I'm primarily concerned about taxes, but that's only because I don't know what the other issues might be. At this point, I believe the owner is planning to just "sign over" the house to her child, but there is also the possibility of selling it for a token amount. Any advice would be welcome.

Property taxes:

In California, property is reassessed on transfer. A parent-child
transfer is exempt from the reassessment if the paperwork is filled
out properly.

Property transfer taxes:

Parent-child transfers are often exempt from that, but it needs
to be checked.

Mortgage:

If there is a mortgage or loan secured by the house, it may become
due on sale OR TRANSFER.

Type of transfer deed:

If a quit-claim deed, child may have difficulty selling the house
in the future. If a grant deed, that's not a problem, but the
transfer may need to be recorded.

Estate and Income Taxes:

It's considered a gift from the parent to the child, subject to
gift taxes (essentially, the excess of the value of the house
plus all other gifts is added back to the value of the estate
for computing estate taxes).

More important, the basis of the house in the child's hands is
the same as it was in the parent's hands. If inherited, the
basis would increase (or decrease!) to the Fair Market Value
at the time of death. This (the gift) might produce increased
capital gains taxes when child sells the house.

Scott Hedrick
04-27-2004, 10:52 AM
"Tracy" <tlbwriter@yahoo.com> wrote in message
news:8phq80do6bnlqmgft051rprjvj5kebtk4g@4ax.com...
Neither is willing to consult an attorney - money is *very* tight, both relevant parties are on a fixed income, and they are both certain that this is "no big deal."

The cost of the attorney would certainly be cheaper than the gift tax the
relative would owe if the value of the house is more than $11,000.

Furthermore, when the house is sold, the child will get to pay capital gains
on the difference between the amount the child paid for the property and the
sale price, whereas for an inheritance, the "basis" (or the acquisition
cost) of the property is its value on the date of death. Thus, the capital
gains would be much less.

It's a whole lot cheaper to consult an attorney beforehand than to fix the
mess later.

Gerald Clough
04-27-2004, 10:52 AM
Tracy wrote:
An elderly relative is planning to give her home to one of her children. This child lives with the homeowner and cares for her, and all potential heirs agree that this child is entitled to the house. The state is Alabama. What are the legal implications they should be concerned about? Neither is willing to consult an attorney - money is *very* tight, both relevant parties are on a fixed income, and they are both certain that this is "no big deal." I hope they're right, of course, but I fear they're being too optimistic. I'm primarily concerned about taxes, but that's only because I don't know what the other issues might be. At this point, I believe the owner is planning to just "sign over" the house to her child, but there is also the possibility of selling it for a token amount. Any advice would be welcome.
Federally, the parents have no gift tax to pay up to $1,000,000 of gifts
over their lifetime. But they must report the gift. That's how IRS
tracks the lifetime total. The child does not pay income tax on the gift.

There are some considerations, though, that make it wise to check. If
the child may one day sell the house, the way they got it will affect
their tax liability, because the tax basis for the house will vary
wildly, depending whether they get it as a gift or they inherited upon
death. There are also estate tax issues. That goes for both federal and
Alabama income tax.

This is just from reading and should be corrected by anyone knowing
otherwise. They should at least ask an accountant, especially for advice
on future taxes. The questions and answers seem pretty simple, and it
shouldn't cost much. A local senior citizen center may know of a source
of free or very cheap tax advice for seniors.

And don't count on "selling the house for a token amount". The tax rules
long ago anticipated that ploy. They also want to do this in good order,
with the proper deed, since they should want to avoid clouding the title.

--
Gerald Clough
"Nothing has any value, unless you know you can give it up."

Don Priebe
04-29-2004, 06:04 AM
> Federally, the parents have no gift tax to pay up to $1,000,000 of
gifts over their lifetime. But they must report the gift. That's how IRS tracks the lifetime total. The child does not pay income tax on the gift.

The exclusion has increased to $1,500,000 for 2004 and 2005.
--
Don EA in Upstate NY

Tracy
05-01-2004, 07:34 AM
[recap... an elderly relative wants to "sign over" her home to a child
who is living with her and acting as a caregiver. Both parties believe
this is "no big deal," but I'm concerned they may be overlooking legal
consequences, especially taxes...]

Thanks for the input, everyone. I'm sorry if my initial post was
vague... I don't really even know what to ask, other than "what bad
things could come of this?" I am certain you cannot simply give a
house away without *someone* having to pay taxes on the gain or the
gift, but beyond that I am clueless. Some additional clarifying
information:

- Yes, the child is an adult.

- There is no mortgage on the house.

- Yes, Medicaid may eventually be an issue... the child/caregiver says
"I'll never put Mom in a nursing home," but of course we know that
sometimes it is the only option. No one is trying to pull a fast one,
but the child has invested quite a bit of time and money into the
upkeep of this house (making major repairs), as well as acting as a
caregiver, and has essentially "paid" the homeowner more than the cash
value of the house, which is why the owner wants to "sign it over."
The Medicaid issue is part of the reason the owner doesn't want to
will the home to the child rather than sign it over now. The other
part of the reason is that she simply wants the child to own the house
outright - this is important to her.

- Regarding the need for a lawyer... you are preaching to the choir. I
know that no matter what I say, a lawyer is not going to be hired. But
perhaps I can find them some free legal assistance, especially if I
can find out what the specific issues are going to be.

- I don't predict the other potential heirs will change their minds
and develop an interest in the house. It is old and in need of work,
and the home and property are probably worth less than $40K. But I
realize people are unpredictible. If they did suddenly decide they had
been swindled out of this prime piece of real estate, what recourse
would they have if the deed had already been done (no pun intended)
while the homeowner was still living?

- The child/caregiver plans to keep the house and eventually will it
to a
child, rather than selling it. However, if the child ends up needing a
caregiver, the house would probably be sold, rather than having a
third generation move in.

Chris Green said:
<<(1) give the house to the child, with a retained life estate: the
value of the life estate reduces the gift value of the house, but
Medicaid cannot step in and claim the remainder; >>

This sounds promising. Is it complicated to set up?

Thanks again for the advice.

Stuart Bronstein
05-01-2004, 07:34 AM
"Don Priebe" <priebe@iname.com> wrote:

Federally, the parents have no gift tax to pay up to $1,000,000 of gifts over their lifetime. But they must report the gift. That's how IRS tracks the lifetime total. The child does not pay income tax on the gift. The exclusion has increased to $1,500,000 for 2004 and 2005.

I made that mistake, too. While the unified credit for estate tax
purposes is as you state, the credit for gifts while the donor is
still alive is limited to $1,000,000. See IRC 2505.

Stu

Dan Evans
05-01-2004, 07:39 AM
On Thu, 29 Apr 2004 09:04:46 -0400, "Don Priebe" <priebe@iname.com>
wrote:

Federally, the parents have no gift tax to pay up to $1,000,000 of gifts over their lifetime. But they must report the gift. That's how IRS tracks the lifetime total. The child does not pay income tax on the gift. The exclusion has increased to $1,500,000 for 2004 and 2005.

For estate tax purposes, yes. But for gift tax purposes, the
exemption is still $1,000,000.


*Dan Evans
*Author of the Tax Protester FAQ
*http://evans-legal.com/dan/tpfaq.html

Christopher Green
05-03-2004, 04:43 AM
tlbwriter@yahoo.com (Tracy) wrote in message
news:<poc7909bjf853lqf2a6qf6o1c1pe9anc0h@4ax.com>...
[snip]
Chris Green said: <<(1) give the house to the child, with a retained life estate: the value of the life estate reduces the gift value of the house, but Medicaid cannot step in and claim the remainder; >> This sounds promising. Is it complicated to set up? Thanks again for the advice.

Not unusually complicated: it's something that any estate planner or
any lawyer who does elder law should understand and be able to explain
and execute for you.

The big drawback to this approach is it makes the house illiquid: as a
practical matter, you can't unwind the deal in such a way as to sell
the house if that becomes desirable before the parent dies.

Putting the house in an irrevocable "Medicaid trust" avoids the
liquidity problem, but it triggers the 5-year lookback rule.

--
Not a lawyer,

Chris Green

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