The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: ChrisLansing on May 01, 2014, 07:46:16 AM
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My wife and I have paid off the mortgage. We'd like our son to have our house. Our wills leave everything to each other, then when we are both dead, everything to our son. Our estate will be small (well under 500K).
Do we just let the house transfer via our wills (hopefully a few decades from now) or is there a better way to transfer ownership? Should we do this before we die? We are not concerned that he would kick us out or anything like that, so we have no problem with transferring ownership now.
We don't want him to get stuck with a lot of taxes when the transfer happens.
I should probably mention we live in the rust belt where homes are absurdly cheap (at least the prices are absurd for those of you living on either coast). That's a major reason our estate will be small.
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This is a bad idea. You don't know that you will be living in that house until you die.
Give your son assets in the usual manner: after you are dead and through established legal means: will, trust, etc.
So many things can go wrong with this (immediately my mind jumps to son gets married, she has instant legal interest in your property, all kinds of fallout happen.)
Don't do it. I think it is very short sighted for parents to assume that their assets become their kid's inheritance. You need those assets until you die. You do not know what's coming in the future.
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I think waiting until you die is the best option.
If you transferred ownership now and your son later sold the home (after you had passed away), he would have to pay tax on the appreciation of the house based on what you originally paid vs the sale price. If your son inherits the house at the time of your death, he would be taxed based on the value of the home at the time of inheritance.
http://www.elderlawanswers.com/do-you-pay-capital-gains-taxes-on-property-you-inherit-12384
If you do transfer ownership now, I believe that would be considered a gift and you would have to declare that on your taxes in the year of transfer. Based on your estimated estate value, you would be well below the lifetime gift exclusion, but would still need to note the gift on your taxes.
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Thank you both. Good thoughts.
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Check the laws in your state. My mother did a "quitclaim deed with retained life estate"; similar transfers are also called "Ladybird deeds". The transfer of ownership does not complete until your death which means your son will inherit at the stepped up basis at that time. The property does not have to be probated and I think it also means you can change your mind and sell it or whatever, at any time, without permission from your son. If you already have assets that are going to be probated it may not help to do it this way? I'm not sure how much probate costs and if it's scaled to the value of the property. My mother wanted to make sure that there was nothing left to probate at all so she put everything into my name in advance. It made her (and my) taxes for these two years a little tricky, but otherwise has worked out well.
My mother worked in probate for many years so she had more than a standard working knowledge of the subject. I am not a lawyer.
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You might also fall on bad times and perhaps need the money that might come from a reverse mortgage on the house. Gifting it to your son now would also likely trigger the IRS gift tax. Not sure if that would be more or less efficient than any estate tax (assuming one applies), but worth considering.
On the other hand, many people engage in "Medicare planning" whereby they transfer assets to children outside the 5-year "look-back" period to avoid having them liquidated to pay Medicare back for long-term care. If you have a medical condition or family history which suggests you may require LTC down the road, you may want to speak to an attorney who handles these sort of things (look for one who specializes in Elder Law).
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You can avoid a house going through probate if he is a joint owner with right of survivorship. This happens all the time. You and your husband probably already have this set up between the two of you. I don't know the laws where you are, but this isn't complicated nor is it controversial (in my opinion). Or once one parent dies, the remaining parent and your son become joint owners, and then when the remaining parent dies the son remains the sole owner. But I wouldn't depend on internet advice for something like this. Talk to an estate planner.
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I assume your son is your only child? Another reason not to transfer ownership is that it usually decimates the relationship between the sibling who gets and the one who doesn't. Presumably this doesn't apply in your situation though.
Also, if your son owns your house he can borrow against it. Although I'm sure you trust him, it's usually better for everyone not to create situations where things can easily go south.
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This is not going to be nice and polite -- I apologize for that, but this isn't a very kind topic that we're discussing:
How old are you? If you're in your late 80s and realistically have few years left, this is more reasonable than if you're 50 (and likely have decades left on Earth).
Your son might be hit with unexpected taxes.
A possibility to consider: Suppose one of you dies tomorrow, while the other lives on another 20-30 years. Suppose that remaining spouse unexpectedly meets another someone special and wants to remarry, and the new couple would like to sell both houses and relocate to the beach or the mountains. Or, if considering remarriage is too difficult to imagine, say one of you and a sibling (or a friend) both find yourself widowed . . . and the two of you want to move in together for companionship. Not having the ability to sell the house /access your equity could become a hardship.
A possibility to consider: You don't mention a daughter-in-law, but let's say your son gets married in a year or two . . . and you don't particularly see eye-to-eye with the girl. Then something happens to him -- an accident, or whatever. Now the girl owns your house. And controls a portion of your future. Or they divorce, and now he owes her half of your house -- and he has to come up with the cash or see you out on the streets.
Another possibility to consider: Say your son falls on hard times. Say he enters into a bad business deal, or he causes an accident -- not that he'd ever WANT to harm you financially, but say he is sued, and he owes a huge amount of money. If you're living in one of his assets, it could be taken from him.
A final possibility to consider: You say you're in the "rust belt" and things are kind of bad already. Suppose things get worse, or worse for your specific neighborhood. To give an example, I live in an "old people's neighborhood". It's a neighborhood of big, old ranch houses built in the 60s and MANY of the inhabitants are the original owners; for whatever reason, FEW houses in this neighborhood EVER go up for sale. In the last couple years TWO of my neighbors just on my small cul-de-sac have been widowed; I fear it's not going to be too many years 'til my neighbors die or are forced into nursing homes /their children's homes. And because so many newer, more stylish neighborhoods have been thrown up around us (and those neighborhoods have pools and clubhouses), I fear that ours will become a rental neighborhood. I want to be among the first to sell rather than the last, and TODAY the biggest selling feature is the terrific location. The larger point: At this moment you have the freedom to make decisions like that -- to decide it's time to get out of the neighborhood -- but if you give the house to your son, you give up that right.
The quit-claim deed can absolutely protect you from some of these nasty possibilities, but they also tie your hands and prevent you from having full access to your assets.
Overall, I think this plan has much risk and little benefit for you. I wouldn't do it.
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This is not going to be nice and polite -- I apologize for that, but this isn't a very kind topic that we're discussing:
How old are you? If you're in your late 80s and realistically have few years left, this is more reasonable than if you're 50 (and likely have decades left on Earth).
Your son might be hit with unexpected taxes.
A possibility to consider: Suppose one of you dies tomorrow, while the other lives on another 20-30 years. Suppose that remaining spouse unexpectedly meets another someone special and wants to remarry, and the new couple would like to sell both houses and relocate to the beach or the mountains. Or, if considering remarriage is too difficult to imagine, say one of you and a sibling (or a friend) both find yourself widowed . . . and the two of you want to move in together for companionship. Not having the ability to sell the house /access your equity could become a hardship.
A possibility to consider: You don't mention a daughter-in-law, but let's say your son gets married in a year or two . . . and you don't particularly see eye-to-eye with the girl. Then something happens to him -- an accident, or whatever. Now the girl owns your house. And controls a portion of your future. Or they divorce, and now he owes her half of your house -- and he has to come up with the cash or see you out on the streets.
Another possibility to consider: Say your son falls on hard times. Say he enters into a bad business deal, or he causes an accident -- not that he'd ever WANT to harm you financially, but say he is sued, and he owes a huge amount of money. If you're living in one of his assets, it could be taken from him.
A final possibility to consider: You say you're in the "rust belt" and things are kind of bad already. Suppose things get worse, or worse for your specific neighborhood. To give an example, I live in an "old people's neighborhood". It's a neighborhood of big, old ranch houses built in the 60s and MANY of the inhabitants are the original owners; for whatever reason, FEW houses in this neighborhood EVER go up for sale. In the last couple years TWO of my neighbors just on my small cul-de-sac have been widowed; I fear it's not going to be too many years 'til my neighbors die or are forced into nursing homes /their children's homes. And because so many newer, more stylish neighborhoods have been thrown up around us (and those neighborhoods have pools and clubhouses), I fear that ours will become a rental neighborhood. I want to be among the first to sell rather than the last, and TODAY the biggest selling feature is the terrific location. The larger point: At this moment you have the freedom to make decisions like that -- to decide it's time to get out of the neighborhood -- but if you give the house to your son, you give up that right.
The quit-claim deed can absolutely protect you from some of these nasty possibilities, but they also tie your hands and prevent you from having full access to your assets.
Overall, I think this plan has much risk and little benefit for you. I wouldn't do it.
MrsPete, I just have to give a shout out to you for being someone on this forum who consistently gives some of the most well thought out, reasonable advice I have ever heard. Most of these scenarios would have never occurred to me, though each one of them is possible and possibly life-changine. So thanks for being so awesome and being on this forum and being willing to give us your time!
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You have many reasons not to do it already. But another thing to consider is how property taxes are structured in your state. In my state, owner-occupied (primary residence) houses are taxed at a lower rate than non-owner-occupied houses. If your son owned the house but you lived in it, the house would be non-owner-occupied. In my state the taxes for the house would therefore be more than twice as much. And of course it would be up to you rather than up to your son to pay those taxes.
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reply from Canada here:
My future husband has a little house, now I live there too. I asked my lawyer what we need to do to get my name on the house title. Lawyer says that because we are not yet married to change the title we'd have to pay "land transfer tax". Not sure what you have in the USA, but in my province it's a % of the value of the home (first $30K in value is 0%, $30k-$60k is xx%, etc). So, on a property that's worth upwards of $300K now, we'd pay over $3700 in tax, plus a flat fee, plus lawyer fees. If we wait til we're officially married, then an inter-spousal transfer is FREE; we'd only pay a registration fee & lawyer fees.
So, keep land transfer tax (or the US equivalent, if there is such a thing) in mind if you do decide to transfer the property to him. It might be A LOT
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A final possibility to consider: You say you're in the "rust belt" and things are kind of bad already.
I think he just used it as a term that describes his location (it's a common term, not necessarily negative unless you're the type of person that hates flyover states), and he didn't say anything about the neighborhood turning bad. It's like saying silicon valley... you don't need to worry that your house is going to sink into a bed of silicon ;)
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I totally agree with Mrs. Pete. You just do not know what the future will hold. The "rust belt" usually is used to describe the Midwest because so many factories left during the 80's & 90's. I lived there during this time. Let your son inherit after you are both dead.
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Estate planning lawyer here.
I agree with most of the comments above regarding not transferring ownership now. If all you are concerned about is "income" taxes, having your son inherit the property is the better way to go due to the tax basis step up at death. You should not be concerned about "estate" taxes as your estate is not large enough to trigger that tax.
If you have other concerns like protecting your assets from long term care costs, the answer may be different and would depend on your age, health, whether you have insurance, whether you have enough other assets to get you through the Medicaid look-back period, etc. If you are afraid of losing your house to your own creditors, you should check to see if your state allows the title to be held as "tenants by the entirety." This is a special way to hold property between a married couple that protects that asset from the creditors of one spouse (e.g. lawsuit).
If you are concerned about probate, you might want to look into whether your state permits beneficiary deeds or transfer on death instruments. In my state (Illinois), you can create a deed that basically allows you to keep full control during lifetime and transfers the property to a child at death without the necessity of probate. A trust will also work to avoid probate but the costs may be more than you want to spend.
If you want to read a bit more about estate planning, I wrote a post about it here: http://jlcollinsnh.com/2013/11/25/death-taxes-estate-plans-probate-and-prob8/
Good luck!
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Thanks to all of you for some really good advice.
I forgot to mention our son (only child) lives with us (so he can grow a mustache instead of paying rent) He's 31.
I had not considered that there might be problems with a future daughter in law, that makes me hesitant to transfer title before death.
Now that I know my estate isn't big enough to trigger estate tax that makes the decision much simpler. I'm not really trying to avoid probate, just didn't want huge inheritance taxes for my son. Apparently that's not an issue.
I hadn't considered the medicare aspect. My wife and I have lifetime health insurance through her employer, which kicks in after medicare has paid what it will pay. (a benefit no longer available to more recent employees) One never knows about future health problems. I'm 57 but my wife is 66. We'll probably wait for a while given the advice received.
I'd sooner die than get a reverse mortgage.
I mentioned being in the rust belt because it has to do with house prices - though I didn't say what my homes' value might be. I'd estimate about 60K which for those of you on the coasts conjures up images of a tar paper shack, or maybe a refrigerator carton. It's a house built in the 1920s, in a so-so neighborhood. The house is in good repair. 1300 sf, 3 brs. That's just how prices are around here.
I'll read up on estate planning but for now I think I have to agree with everyone who said don't transfer title right now.
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MrsPete, I just have to give a shout out to you for being someone on this forum who consistently gives some of the most well thought out, reasonable advice I have ever heard. Most of these scenarios would have never occurred to me, though each one of them is possible and possibly life-changine. So thanks for being so awesome and being on this forum and being willing to give us your time!
Aw shucks, thank you for those kind and unexpected words.