Dear Benny: I have a question that may or may not be an issue with the couple who want to “gift” the house to their disabled daughter. If the daughter’s disability is one that renders her mentally incompetent, wouldn’t that mean that she could not convey title at a later time? Doesn’t the grantor have to be mentally competent to grant title to the property?
I know the nature of the disability wasn’t disclosed in the letter in your article, but wouldn’t that be a consideration? Also, wouldn’t this be a proper situation to grant a life estate to the daughter? –Dan
Dear Dan: You are correct. The grantor — the person who conveys real estate — must be legally and mentally competent. She must understand exactly what she is doing, or the deed may be considered invalid.
Accordingly, when one signs a deed, it generally has to be notarized. And the person notarizing that document — and/or the attorney who prepared the deed – must be absolutely certain that the grantor fully understands the consequences of her actions.
Your suggestion that the daughter be given a life estate is a good one. That means that the daughter has the right to live in the house until she dies, and on her death the property will go to whoever is named as the “remainderman,” i.e., the person who will own the property after her death.
However, with a life estate, the person holding that estate is generally responsible for taxes, insurance and maintenance. Accordingly, if such a life estate is created, the document spelling this out should make it clear who will be responsible for these expenses.
There is another alternative. If the daughter is mentally incompetent, the father can petition the local court to have a guardian and conservator appointed for his daughter. Generally, the guardian takes care of the physical needs of the ward, while the conservator handles the financial issues. Of course, while the father is alive and mentally alert, he should be handling all of this without the need for court intervention.
TAX ALERT: I receive a large number of email questions on a monthly basis, and try to answer as many as I can. I wish I could respond personally to everyone, but that is not possible.
Although many questions are unique and different, one issue predominates, namely: “I want to gift my property to my children.”
Readers will know that under most circumstances, I do not like this idea, as there are usually tax consequences. As I have written many times before — and suspect I will continue to write — “the tax basis of the giver of the property (the giftor) becomes the tax basis of the recipient of the gift (the giftee).”
This means that if the parents bought the house years ago for $100,000 and it is now worth $500,000 (yes, appreciation still happens despite our current economy), the kids’ basis for tax purposes is $100,000. Of course, if the parents made major improvements, that would increase their tax basis.
Unless the kids actually end up owning and living in the property for two out of the five years before it is sold, they will have to pay a large capital gains tax to the IRS. In this example, if the kids sold the house immediately after the parents died for $500,000, their gain would be $400,000 ($500,000 minus the tax basis of $100,000). Currently, the federal capital gains tax rate is 15 percent, which means they will have to pay upwards of $60,000 to the IRS, plus any applicable state and local tax.
However, if they inherited the property, they would be able to take advantage of the “stepped-up” basis, which means that the value of the house on the parents’ death becomes the tax basis of the beneficiaries. Thus, in this example, if the house were sold for $500,000, there would be no capital gains tax to pay.
But now there is yet another problem with gifting the house: The IRS has mounted a major campaign to ferret out unreported taxable gifts.
Currently, taxpayers can gift (tax-free to everyone) up to $13,000 to individuals. You can gift this amount to each of your children, and if you are married, both you and your spouse can make similar gifts.
However, gifting a house clearly is more than $13,000. If that’s the case, you have to file a gift tax return. There is no immediate tax consequence, but it may impact on your lifetime exemptions. (Check with your local tax advisers for more details.)
The bottom line, however, is that the IRS is watching and you should be very careful and get good tax and legal advice before you make that gift.
Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to email@example.com.