We are in our 80’s and would like to transfer ownership of some houses to our children. How are we supposed to make this tax-friendly? – Market observation | Vette Leader

We are a married couple in our 80’s who have retired since 1996. We have two children who live in two of our houses. We would like to know when we should initiate a transfer of the titles to the children that would be advantageous for them from a tax point of view.

Many Thanks.

The parents

Dear Parents:

You are generous to your children, but since the houses are already in use by them, what’s the rush to get the titles in their names?

Your focus on your taxes sounds like a noble reason, but what’s working best for you as a couple? Your financial situation, assets and family relationships are crucial.

The key factor is the value of your total assets, then your federal and state estate tax situation, and how your will and trust, if you have one, are drafted. Then there are the Medicaid eligibility rules and gift and estate tax issues.

Without knowing all of your financial details and the state you live in, I can only give you a broad outline of things to consider. I urge you to consult your accountant, attorney or other advisor.

It is important to talk to your children. You want to be clear about what you are giving and why. Above all, explain the big picture and what the result will be as inheritance. According to a study, more than 80% of parents are not transparent with their families about their finances.

Without clarity and understanding, your adult children may be confused, expecting a larger inheritance, or worrying unnecessarily about you and your spouse.

What to consider

Before you act, think of yourself. Evaluate whether you have enough to provide for both of you for the rest of your life.

According to life expectancy tables, the average 80-year-old could live another seven to nine years; however, lifestyle, health issues and quality of life are not taken into account. Most financial planners make financial projections up until age 95 or 100, which strikes me as prudent given that people are living longer.

Your gift could affect your eligibility for Medicaid. Almost all states have a 60-month lookback period, although some states have shorter ones. This is to ensure you haven’t given away any assets or sold them below market value to qualify for everything from free or discounted home care to nursing home payments. Familiarize yourself with your state’s rules before making a title change.

While Medicaid is not an issue, be realistic about the cost of additional home care, assisted living, or nursing facilities. Keeping the homes can give you more funds in the long run to pay for that care if needed.

On the relationship side, think about these questions:

  • What is your goal with your children? To help them financially? Do you make them self sufficient?

  • How will this affect your other children, if you have any? Or affect every child if those homes aren’t of equal value?

  • How would you feel if one or both of you sold their house before you died?

  • What other financial gifts do you give your children?

Financial decisions affect family relationships. Remember that once the property is titled in their name, your adult child can do anything with it. Think about how watching their decision-making might affect you.

It’s important to communicate your expectations. I watched a young couple sell a house given to them by my client. The couple then bought a larger home and asked the parents to contribute financially to this new property so they could improve it. This left the parents frustrated and unable to say no. However, the young adults could not afford the added expense of a larger home and were plagued by debt. The parents were disappointed.

How to transfer ownership

If your goal is to save your kids tax dollars, it’s usually best to wait until you die and let them inherit the homes. You acquire ownership at the market value of the home at the time of your death, rather than giving it away now, when their cost base begins with the price when you bought the home. This is important for calculating capital gains on each sale.

Under today’s rules – which adjust for inflation and are sometimes reduced by legislation – you can pass on $12.06 million ($24.12 million for a pair) free of federal estate taxes.

Read: The IRS just made it easier for families to pass millions of dollars on to their children and others

The home’s value is “added” at death and becomes the starting point (the “cost basis” for the IRS) for calculating capital gains taxes when they are sold.

Read: This is how you can save on capital gains taxes when selling your home

Even if your estate is well below the federal tax-exempt limits, your estate and gift may be subject to state taxes. Eleven states have an estate tax, and they start at just $1 million; five levy an inheritance tax.

If you want to gift the homes all at once before you die, it can still be gifted tax-free, but you must file IRS Form 709 for the tax year of the transfer of ownership. The amount you give away is reduced by your inheritance tax exemption limit when you die.

Remember, this form is required if you are giving a gift of more than $16,000 (2022 limits) to a person in one year.

There are many ways to transfer a track other than all at once. There are real estate trust options that guarantee transfer upon your death. For example, by setting up a revocable trust for the benefit of your child and investing in the specific property now, you guarantee that they will receive the property in which they live. It also allows you to retain control of the property in case you need to sell it Loan or rent to cover retirement medical needs.

Another example: some parents transfer a title over time. As a couple, you can give up to $32,000 per year to each child ($16,000 from each of you) or $64,000 if you also give a similar gift to the partner or spouse. Again, these are the limits of 2022.

Overall, this approach gives you more flexibility for your estate planning. You can do this with any asset, and your decision doesn’t have to be all or nothing.

In order to transfer title in a home over time, the title must be changed each time you donate something and it must be noted on the state records of where the property is located. Please consult legal counsel to ensure this is done correctly.

Finally, consult your attorney about the implications for your estate and any necessary changes to your will and other documents. Talk to your accountant to make sure you comply with tax laws.

Then make the best decision for both of you.

CD Moriarty is a certified financial planner, columnist for MarketWatch, and personal finance speaker. She blogs at MoneyPeace.

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