DEAR BENNY: I have a question that might interest your readers and one that I am quite confused over.
My husband passed away just over a year ago and we had always hoped to leave our $300,000 home to our three children, ages 52, 48 and 47, when I pass on. I am in good health, 78 years old and receive social security and a small pension and have investments which I draw from. Twelve years ago, we put all our assets, except our home, into a living trust. Now that my husband has passed, I have been informed by the firm who set up the trust that I should now put the house into the trust.
Once I started checking with legal help, to put the house in the children’s names, I discovered that not all the help I received was in agreement with turning the house over to the children. I was given two suggestions: One was to do a “deed with life estate” and the other is called an “irrevocable trust.” Needless to say, I am more confused now than when I started. I know our state requires a five-year look-back period and I don’t want to wait an extended time to do something.
I hope you can help me with what would be the best solution to my concern. – Phyllis
DEAR PHYLLIS: I can only provide general suggestions and observations; I cannot give you legal or financial advice. You should consider retaining a lawyer who specializes in elder law.
First, you are mixing apples with oranges. The five-year look-back period involves Medicaid planning. If you are on – or expect to be on – Medicaid, then that is one consideration. An elder law attorney in your state can fill you in on the requirements of your state.
The idea of an irrevocable trust is generally to remove assets from one’s estate for estate-tax purposes. Only if your total assets exceed $5.43 million would that be an issue for federal estate-tax purposes. But it could be an issue for state estate-tax purposes, depending on the state. I don’t know the answer.
Both a revocable trust and deed with reserved life estate would accomplish avoiding probate, which is a different consideration. If that is a goal, either could work, and your beneficiaries would receive a step up in basis on death. With the life estate deed, you will need to file gift tax reporting on the value of the remainder interest at the time of the deed. In addition, with the life estate deed as well as a revocable trust, the full value of the real estate is includable in the grantor’s estate for estate-tax purposes.
What you don’t want to do is to deed the property now – during your lifetime – to your children. Why? I am sure you and your husband bought the house many years ago and it has increased significantly in value. When you give a gift, your basis for tax purposes (i.e., what you paid for it plus any capital improvements) becomes the tax basis of the recipient. That means that when the children sell the property, unless they have lived in and owned the property for two out of the five years before sale (in which case they can claim an exemption up to $500,000 for married filing jointly or up to $250,000 for a single filer), they will have to pay a capital gains tax. And currently, for many taxpayers, that’s 20 percent of the profit.
On the other hand, if they get the property on your death, they get what is known as a “stepped-up” basis. That means their basis for tax purposes is the value of the property at the time of your death – and not at the time you and your husband initially purchased the property. (I do recognize that when your husband died, you most likely took a stepped-up basis on his half). And if the children sell at that valuation, there is no gain and no capital gains tax to pay,
One further thought: Find out if your state has adopted the transfer of deed on death act. If so, you can prepare – and record – a deed now to your children, but it will not take legal effect until you die. And if you change your mind, you can always cancel that deed.
Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: [email protected].