As we get older, planning for the future and managing our assets becomes increasingly important. One of the key concerns for many people is how to minimize the amount of inheritance tax their estate will be liable for after they pass away. One idea that often comes up in estate planning is the possibility of transferring your house to your children in order to avoid inheritance tax. In this article, we will explore the legality and implications of this strategy and offer some alternative solutions.
The Truth about Transferring Your House to Your Children
The short answer is that, technically, it is possible to transfer your house to your children in order to avoid inheritance tax. However, this approach is not without its risks and complications. Here are a few things to consider:
1. Gift Tax
When you transfer ownership of a property to someone else, it is considered a gift, and you may be subject to gift tax. In Wisconsin, the annual gift tax exclusion amount for 2023 is $17,000 per individual or $34,000 per married couple. If the value of the house you are transferring exceeds this amount, you will be required to pay gift tax on the difference.
2. Capital Gains Tax
When you transfer your house to your children, the house's cost basis is reset to the current fair market value. If your children then sell the house, they will be subject to capital gains tax on any increase in value since the date of the transfer. This could result in a significant tax liability for your children.
3. Medicaid Eligibility
Transferring your house to your children could also have implications for your eligibility for Medicaid. If you require long-term care in the future, Medicaid may require you to use your assets to pay for your care before you can qualify for coverage. If you have transferred your house to your children, it may be considered a gift that would impact your eligibility.
4. Loss of Control
Transferring your house to your children means you are no longer the legal owner of the property. Your children would have full control over the property, and you would have no legal right to live in or use the property. If your relationship with your children becomes strained, this could create problems down the road.
A Better Solution: Revocable Living Trust
If you are looking for a way to minimize the amount of inheritance tax your estate will be liable for after you pass away, a revocable living trust could be a better solution. A revocable living trust is a legal entity that you create and can change or dissolve at any time during your lifetime. When you transfer ownership of your assets, including your house, to the trust, you maintain control of the property, but the trust becomes the legal owner. This means that when you pass away, your assets can be distributed to your beneficiaries without going through probate, which can save time and money.
In addition, a revocable living trust can help you avoid estate taxes by removing assets from your taxable estate. This can be especially beneficial if you have a large estate that exceeds the federal or state estate tax exemption amount.
Contact an Estate Planning Attorney in Wisconsin
Transferring your house to your children to avoid inheritance tax is a strategy that may seem appealing at first, but it comes with risks and complications that are important to consider. A revocable living trust can be a better solution for estate planning and minimizing estate taxes.
If you are interested in learning more about estate planning, probate, or business law, please contact Heritage Law Office at 414-253-8500 or send us a message. Our experienced attorneys can help you navigate the complex legal landscape and find the best solutions for your unique needs.
Frequently Asked Questions (FAQs)
1. What is inheritance tax and how does it work?
Inheritance tax is a levy paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the deceased's estate (money and property) before it is distributed to the heirs. The exact process varies from state to state, but generally, inheritance tax obligations fall to the beneficiaries of the estate.
2. What are the risks of transferring my house to my children?
The risks of transferring your house to your children include potential gift tax liability, capital gains tax implications for your children, implications for your Medicaid eligibility, and loss of control over the property. It's crucial to carefully consider these risks and consult with a professional before making a decision.
3. What is a revocable living trust and how can it help me avoid estate taxes?
A revocable living trust is a legal entity that holds ownership of your assets during your lifetime. You maintain control over the trust and its assets but they are legally owned by the trust, not by you. This means that when you die, your trust's assets bypass probate, potentially saving significant time and money. Additionally, because the assets are not counted as part of your taxable estate, you may be able to avoid or minimize estate taxes.
4. Is it possible to avoid inheritance tax by moving to a different state?
While some states have no inheritance or estate tax, moving specifically to avoid these taxes is not always practical or feasible. Your entire situation, including your health, financial stability, and family needs, should be taken into account. Moreover, remember that the federal estate tax applies regardless of where you live within the United States.
5. Where can I get professional advice on estate planning?
Estate planning can be complex and the stakes are high. It is advisable to consult with a professional, such as an estate planning attorney or financial planner. They can help you understand your options, navigate the legal landscape, and find the best solutions for your situation. If you're in Wisconsin, consider reaching out to Heritage Law Office for experienced advice and assistance.