In many families, it's customary to pass on the family home to surviving children after the parents' death. You may be considering how to give your child or children your home without the sting of taxes later. It is possible, and there are a few ways to accomplish it, but it takes some advanced planning to make sure everything happens in a way that provides the most benefits to your family.
You may be concerned about Medicaid “taking your house” or spending down your assets to receive Medicaid benefits. “Estate recovery” occurs after your death, when the state goes through your assets to recover costs of your long-term nursing home care while you were alive. Since a house is often the only major asset many individuals have, frequently, the home is sold and the funds are used to repay Medicare; however, you can protect your home from a Medicaid estate recovery and sale.
Writing Your House into Your Will
Although estate recovery issues need to be considered using this method, taxes can generally be reduced or eliminated as individuals receiving property upon the death of another are entitled to an adjustment in the cost basis (a step-up) when there are built in gains.
How to Gift Your House
Gifting the family house to children has consequences that are often unforeseen by families looking to safeguard their assets. Making such a transfer puts you in a difficult position if your children go through divorce, bankruptcy, incur liability due to a lawsuit, or other financial problems occur that may require re-selling the house.
If you're planning to move out of the house now, you can give the property to your child, however attorneys generally have better techniques than making such a transfer. For help passing on your family home, contact a Wisconsin estate planning attorney.
How to Gift Your Home with a Life Estate
A Life Estate allows you to transfer part ownership to your children (or anyone else) while you're alive. You can live in it (or rent it out) during your lifetime and, when you die, the remaining ownership passes to your kids (or others to whom the asset was transferred), who may then take full possession and ownership of the assets.
Placing the home in an irrevocable trust with your children as the beneficiaries is another option. Doing so may help you avoid estate taxes, qualify for Medicaid for nursing home or assisted living facility expenses, and protect the house from Medicaid estate recovery. Careful planning is a must as making a transfer to an irrevocable trust may cause an ineligibility period for Medicaid for a period of time after such a transfer of your home. If the house is eventually sold, the proceeds remain in the trust and the proceeds of the sale will be passed to the trust beneficiaries.
How Much is the Gift Tax on Real Estate?
If you gift a piece of real estate to directly to your child or grandchild, it is perceived as a gift by the IRS. You cannot claim a loss, nor is your gift tax deductible. The tax issues belong in the expenditures category rather than as savings. You can gift a maximum of $15,000 in 2018, but gifting more does not necessarily warrant the payment of taxes, however, you will have to file a gift tax return (Form 709) as a formality. Some individual cases vary, but a qualified estate planning attorney has all of the answers to your questions regarding gifting real estate.
Frequently Asked Questions (FAQs)
1. What is estate recovery and how does it affect my home?
Estate recovery is a process where the state goes through your assets after your death to recoup costs of your long-term nursing home care that was covered by Medicaid during your lifetime. Since a house is often the only major asset many individuals have, it might be sold to repay Medicare. However, with proper planning, your home can be protected from Medicaid estate recovery and sale.
2. How can I pass my home to my children through my will?
By writing a will, you can designate a beneficiary for your home. The beneficiary, upon your death, will be entitled to an adjustment in the cost basis of the home (a step-up) when there are built-in gains. This method can generally reduce or eliminate taxes.
3. What are the potential risks of gifting my house to my children?
While gifting a house to children might seem like an effective way to safeguard assets, it can lead to unforeseen consequences. If your children face financial troubles such as divorce, bankruptcy, or lawsuits, they might be forced to sell the house. Hence, consulting an attorney before making such transfers is often beneficial.
4. What is a Life Estate and how can it help in passing my home to my children?
A Life Estate is a way to transfer partial ownership of your home to your children (or anyone else) while you're alive. You maintain the right to live in it or rent it out during your lifetime. Upon your death, the remaining ownership passes to the beneficiaries, who can then take full possession and ownership.
5. How does the gift tax apply when I gift real estate to my child?
If you directly gift a piece of real estate to your child or grandchild, the IRS considers it as a gift and it is not tax-deductible. You can gift a maximum of $17,000 in a year (as per 2023 rules) without owing any taxes. Gifting more does require you to file a gift tax return (Form 709), even though you might not have to actually pay additional taxes. It's always advised to consult an estate planning attorney for detailed advice tailored to your situation.
Estate Planning Strategies With Heritage Law
Considering how to give your children your house or other assets? Be sure to work out a plan with a knowledgeable estate planning and elder lawyer. Contact elder law attorney Brad Sarkauskas of Heritage Law by calling 414-253-8500 or by filling out our online form for a free consultation. Our goal is to achieve results that will benefit future generations.