Parents want to transfer title of vacation home to me - Risks?

[charis]

I don't know where to put this, so here it goes.  I will certainly be consulting with a lawyer, but first I ask the forum:

What are the drawbacks/benefits to my parents transferring title of their ownership in a vacation lake house to me and my sister.  We would have 50% ownership (uncle has other 50%).  In a practical sense, they are not giving it to us.  They pay the mortgage, taxes, and up keep, and will continue to maintain/use the property as they always have in the summer. 

They want to execute this as soon as possible (Medicaid-related reasons).  Quite frankly, I was reluctant when they first brought it up.  I don't really want ownership of this property - it is an unreasonable distant away and will probably need costly foundation upgrades in the next 5-10 years.  If everything goes smoothly, my parents and uncle will take care of everything until they pass away, and then we will deal with whether to sell it. 

If things go badly (parents late on tax bill, someone gets hurt on the property, etc), I see lots of risk.  Am I being to cautious?  This is a very emotional issue for my parents and they don't understand why I am hesitating.

[CheapskateWife]

What you don't say is whether or not you could afford the 50% of the mortgage if your parents flake out or pass away unexpectedly.  Do they have insurance holdings that would cover your remaining 50% of ownership?  If the financial piece is covered, will you profit off the ownership (renting it out when you aren't using it?) 

If the answer to either of those questions is no, I can certainly understand why you would politely decline the offer. 

[Frankies Girl]

I wouldn't do it. It would mean they'd have to file for gifting something over the 14K allowable, and you'd lose the advantage of stepped up cost basis when property is inherited. If it's appreciated significantly since they bought it, you do not want to have it gifted to you. And yes, Medicaid can be effected even if a house is gifted...

While your parents may not have to pay taxes on the gift, if you sell the house right away, you may be facing steep taxes. The reason is that when property is given away, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose your parents bought the house years ago for $150,000 and it is now worth $350,000. If they give their house to you, the tax basis will be $150,000. If you sell the house, you will have to pay capital gains taxes on $200,000 -- the difference between $150,000 and the selling price. The only way for you to avoid the taxes is for you to live in the house for at least two years before selling it. In that case, you can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If you were to inherit the property, the property's tax basis would be "stepped up," which means the basis would be the current value of the property. However, the home will remain in your parents' estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to you can affect your parents' eligibility for Medicaid coverage of long-term care.  There are other options for giving a house to children, including putting it in a trust or selling it to them. Before your parents give away their home, they should consult with their elder law attorney, who can advise them on the best method for passing on their home.

Not to mention the hassle of having a property in your name that is legally yours but are unable to make decisions on without a whole bunch of committee meetings, and all the headaches that go with that (the lack of actual control if you value the relationship with your parents/sister).

[charis]

What you don't say is whether or not you could afford the 50% of the mortgage if your parents flake out or pass away unexpectedly.  Do they have insurance holdings that would cover your remaining 50% of ownership?  If the financial piece is covered, will you profit off the ownership (renting it out when you aren't using it?) 

If the answer to either of those questions is no, I can certainly understand why you would politely decline the offer. 

 I don't know what the balance of the mortgage is.  I will find that out of course.  I did not realize that I would be liable for paying the mortgage if I am not actually on the mortgage.  I would not accept the transfer if there was a chance that I could be on the hook for the mortgage, should something happen.

I will not profit from ownership, at least while my parents and uncle are still living.  The property can only be used in the warm months - end of May to beginning of October.  So the older generation will continue to use it during that time.  I go up for a week and the other 3 cousins use it even less, if at all.  I think the only rational thing will be to sell it when the younger generation takes over, unless we can all agree to rent it.

I wouldn't do it. It would mean they'd have to file for gifting something over the 14K allowable, and you'd lose the advantage of stepped up cost basis when property is inherited. If it's appreciated significantly since they bought it, you do not want to have it gifted to you. And yes, Medicaid can be effected even if a house is gifted...

While your parents may not have to pay taxes on the gift, if you sell the house right away, you may be facing steep taxes. The reason is that when property is given away, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose your parents bought the house years ago for $150,000 and it is now worth $350,000. If they give their house to you, the tax basis will be $150,000. If you sell the house, you will have to pay capital gains taxes on $200,000 -- the difference between $150,000 and the selling price. The only way for you to avoid the taxes is for you to live in the house for at least two years before selling it. In that case, you can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If you were to inherit the property, the property's tax basis would be "stepped up," which means the basis would be the current value of the property. However, the home will remain in your parents' estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to you can affect your parents' eligibility for Medicaid coverage of long-term care.  There are other options for giving a house to children, including putting it in a trust or selling it to them. Before your parents give away their home, they should consult with their elder law attorney, who can advise them on the best method for passing on their home.

Not to mention the hassle of having a property in your name that is legally yours but are unable to make decisions on without a whole bunch of committee meetings, and all the headaches that go with that (the lack of actual control if you value the relationship with your parents/sister).

My parents' estate attorney is really pushing for the transfer now to avoid the 5-year look back period with Medicaid.  As for capital gains, my understanding is that it is not much if you are in the 15% tax bracket or lower.

I do worry about how this could effect our relationship.  But it might be worse if I refuse.  On the other hand, my sister has already agreed to ownership being put in her name, so that technically takes care of the Medicaid issue (theoretically).  So I would lose out on a gift that might be very useful down the road (esp. with 2 kids potentially going to college).

[27y/oTennesseeRetiree]

Nope.

Nope.

Nope.

Let them give it to your Uncle or your Sister.

Or sell it.

If it was a good fit you wouldn't be hesitating. The odds of structuring it so it is a good fit without hurting or pissing off someone you love is not good.

Tell your parents you love them and you appreciate the gesture but you can't afford it.

That being said, perhaps they could put it in a trust with you as the beneficiary. That allows them to give it to you without giving to you and shelter the income so it doesn't impact their medicare/caid.

Good luck!

[burly]

You should absolutely be cautious... However, I have good news for you.

If there truly is a mortgage on it.. They're not going to be able to change the title.  Frankly, I'll be quite surprised if their bank lets them without refinancing, new title insurance, etc.

If they are willing/able to do all that... I'd have the property transferred into an LLC, make uncle 50% owner and you 50% owner. This  way your liability *should* be limited to the LLC. If you do decide to rent in the future, you can take depreciation as well..

In summary - If their bank will let them change the title - then consult the attorney - preferably one who is an estate planner.

[charis]

They have an estate planner - a very good, experienced one.  I haven't spoken to him yet, but we are setting up a meeting to discuss this. 

Based on what you are saying, if they can't transfer title without the mortgage (I will never agreed to being on the mortgage), I have to assume that they are planning to give it to me in trust.  The property is current held in trust by my parents and my uncle, 50/50.  Uncle is trustee.   My parents know nothing about the specifics of estate planning, so they may not be explaining it very well.

[CheapskateWife]

That is excellent that you are visiting with the estate planner...write out all your questions in advance and even if mom and dad are there with you, don't be afraid to ask ugly what-if questions.   You have way more of your life ahead of you to ruin if this goes sideways.

Pay attention to your spidey-senses Jezebel, if it doesn't feel right, don't agree to anything.  Your parents will still love you (perhaps with an asterisk).

[GizmoTX]

If the property is currently in a trust, why would it be subject to Medicaid claw back? And how can its ownership be transferred?

[charis]

Why couldn't ownership of property held in trust be transferred?  I assume that there are provisions of the trust that I am not privy too yet, but if ownership couldn't be transferred, this issue would not have come up at all.  As for the Medicaid claw back, that is a very good question.

[KD]

Say you agreed and they get it transferred...are you going to be resentful of paying taxes & upkeep on something that you rarely use because of the distance?  Are you willing to be footing part of the bill for your cousins to play at no cost to them?  Ehhh, unless those types of possible scenarios sets well with you, I'd pass.

[tomsang]

Those saying no, no, no without digging in seems strange to me. Would you also pass up a $100 bill on the ground because it might be a trick, you might throw your back out, etc.?  I think caution is warranted, but unless your parents are known to screw over their kids why not invest in understanding the pros and cons. Doing this for Medicaid reasons warrants a bit more skepticism but a good attorney should be able to educate you on the risks.

It sounds like they want to give you two something, but understand that their futures financial situation is not positive and they are preparing themselves for Medicaid.

Good luck. Don't walk away from a good thing, but don't jump in without understanding the meaning.

Tom

[charis]

Say you agreed and they get it transferred...are you going to be resentful of paying taxes & upkeep on something that you rarely use because of the distance?  Are you willing to be footing part of the bill for your cousins to play at no cost to them?  Ehhh, unless those types of possible scenarios sets well with you, I'd pass.

I will not be paying any taxes or upkeep until my parents either pass away or are financial unable to do so.  When it came to that, we would look hard at selling.  I am also not footing the bill for my cousins.  They will be inheriting my uncle's half ownership, so they will be responsible for their half.  They have used it for maybe a weekend in the past 10 years, so I would be benefiting way more from this arrangement than them, as far as paying to taxes and expenses would go.

 Based on usage and distance alone, I think selling will be highly likely once the current generation is unable to use the property any longer.

Those saying no, no, no without digging in seems strange to me. Would you also pass up a $100 bill on the ground because it might be a trick, you might throw your back out, etc.?  I think caution is warranted, but unless your parents are known to screw over their kids why not invest in understanding the pros and cons. Doing this for Medicaid reasons warrants a bit more skepticism but a good attorney should be able to educate you on the risks.

It sounds like they want to give you two something, but understand that their futures financial situation is not positive and they are preparing themselves for Medicaid.

Good luck. Don't walk away from a good thing, but don't jump in without understanding the meaning.

Tom

Thank you for the advice.  They are actually not bad off regarding retirement.  Two pensions (one great one), SS, and decent 401Ks that they haven't touched yet (retired 5 and 10 years so far).  But decent long-term care costs are no joke, so they probably want to be prepared. Both of my maternal grandparents had Alzheimer's disease.

[ShoulderThingThatGoesUp]

Say you agreed and they get it transferred...are you going to be resentful of paying taxes & upkeep on something that you rarely use because of the distance?  Are you willing to be footing part of the bill for your cousins to play at no cost to them?  Ehhh, unless those types of possible scenarios sets well with you, I'd pass.

I will not be paying any taxes or upkeep until my parents either pass away or are financial unable to do so.  When it came to that, we would look hard at selling.  I am also not footing the bill for my cousins.  They will be inheriting my uncle's half ownership, so they will be responsible for their half.  They have used it for maybe a weekend in the past 10 years, so I would be benefiting way more from this arrangement than them, as far as paying to taxes and expenses would go.

 Based on usage and distance alone, I think selling will be highly likely once the current generation is unable to use the property any longer.

What if you want to sell but your cousins/uncle don't?