Best Method for Living Parents to Transfer Real Estate to Their Children? - Tax-free if Possible

[G-Man]

What is the best method for parents still living to transfer their home to their children? The children will sell the property once both parents pass away. The goal is to avoid any huge tax consequences such as capital gains when selling the property.

Here is an article that provides a few methods.

How Do I Transfer Property to a Family Member Tax-Free?

Giving your house to your children can have tax consequences, but there are ways to accomplish it tax-free. Here are four potential options to consider.

www.elderlawanswers.com

Any opinions on this topic?

 

[njhowie]

Two that come to mind.

1. Just have it in your will that the children get the house. Their cost basis of the inherited property is the fair market value of the property on the date of death. If they sell immediately for market value there will be no capital gain. Update: Now that I actually read the article, I see this is their first option.

2. Alternatively, what my mom did for me and sis was to have the home put into a life estate (life estate deed), which accomplishes the same. You remain the owner, upon death ownership transfers to the children at the stepped up basis. There is no need to go through probate going this route as it is outside the will.

 

[OldShooter]

WADR you need to understand the basis step up rules. The surest way to pay extra taxes is to miss this.

 

[G-Man]

WADR you need to understand the basis step up rules. The surest way to pay extra taxes is to miss this.

Yes. This article explains the step up in basis for inherited property once someone dies. In the scenario I posted, the parents will transfer the property to their kids while they are still living in order to qualify for long term care assistance like Medicaid.

Giving Your Home to Your Children Can Have Tax Consequences

Giving away a house can have major consequences, involving gifts, capital gains, estate taxes, and more.

www.elderlawanswers.com

In this case, would putting the property in a trust (not sure what type of trust) be the best method to safeguard the property against the Medicaid 5 year look back rule as well as reduce the tax consequences when the kids sell the property upon the parents' death.

I'm just asking the questions to educate myself so please be nice. lol

 

[SecondCor521]

Yes. This article explains the step up in basis for inherited property once someone dies. In the scenario I posted, the parents will transfer the property to their kids while they are still living in order to qualify for long term care assistance like Medicaid.

Giving Your Home to Your Children Can Have Tax Consequences

Giving away a house can have major consequences, involving gifts, capital gains, estate taxes, and more.

www.elderlawanswers.com

Consider that the taxes avoided by step up in basis might pay for the long term care. I'm not sure which is more expensive. I suppose it would depend on how expensive of a house, and how long on Medicaid.

I think some states also have homestead provisions to protect the remaining spouse while one is on Medicaid. Probably varies by state.

In this case, would putting the property in a trust (not sure what type of trust) be the best method to safeguard the property against the Medicaid 5 year look back rule as well as reduce the tax consequences when the kids sell the property upon the parents' death.

I'm just asking the questions to educate myself.

I doubt any sort of trust exists that can simultaneously avoid Medicaid look back *and* retain step up in basis. In order to avoid Medicaid look back it would probably have to be an irrevocable trust. And I think an irrevocable trust would rule out step up in basis because putting the house into an irrevocable trust would represent a completed gift, resulting in the basis of the house being under "gift" rules, not "inheritance" rules.

 

[OldShooter]

Yes. This article explains the step up in basis for inherited property once someone dies. In the scenario I posted, the parents will transfer the property to their kids while they are still living in order to qualify for long term care assistance like Medicaid.

Giving Your Home to Your Children Can Have Tax Consequences

Giving away a house can have major consequences, involving gifts, capital gains, estate taxes, and more.

www.elderlawanswers.com

In this case, would putting the property in a trust (not sure what type of trust) be the best method to safeguard the property against the Medicaid 5 year look back rule as well as reduce the tax consequences when the kids sell the property upon the parents' death.

I'm just asking the questions to educate myself so please be nice. lol

Medicaid and spend down rules is a swamp. Find an expert attorney in your state and spend the money to get the job done right.

 

[G-Man]

Consider that the taxes avoided by step up in basis might pay for the long term care. I'm not sure which is more expensive. I suppose it would depend on how expensive of a house, and how long on Medicaid.

I think some states also have homestead provisions to protect the remaining spouse while one is on Medicaid. Probably varies by state.



I doubt any sort of trust exists that can simultaneously avoid Medicaid look back *and* retain step up in basis. In order to avoid Medicaid look back it would probably have to be an irrevocable trust. And I think an irrevocable trust would rule out step up in basis because putting the house into an irrevocable trust would represent a completed gift, resulting in the basis of the house being under "gift" rules, not "inheritance" rules.

You are right. Looks like IRS did away with the step-up basis in Irrevocable trust. However, the article states that Assets transferred to a revocable or “living” trust continue to receive the step-up.

IRS: No step-up in basis for assets in Irrevocable grantor trust

Per IRS Revenue Ruling 2023-2, for assets that were conveyed to an irrevocable grantor trust, there is no “step-up” in tax basis at the grantor’s death.

www.halaw.com

Does property inside a revocable living trust get a step up in basis at the death of a trustee? - Bogleheads.org

 

[sakowitzm]

Not directly stated in the above comments: the surviving children MUST, as soon as possible after the death, get a professional appraisal on the house. That's the only way to substantiate the stepped-up cost basis of the inherited property. This is especially important if the children are to keep the house for some length of time.

 

[G-Man]

Looks like a revocable or living trust does not help you qualify for Medicaid.

Are Revocable or Irrevocable Living Trusts Useful in Qualifying for Medicaid?

Most trusts, even irrevocable ones, no longer work to qualify an individual for Medicaid.

www.nolo.com

 

[FlaGator]

In this particular area, it looks like the Feds have figured how to prevent someone from giving away valuable things, tax-free, solely to be able to feed from a different part of the taxpayer trough. Good thing, IMO.

I'll pay for myself to the end and the kids get what's left and whatever tax consequences there are (which I am hoping to minimize now).

 

[jazz4cash]

There is a onetime cap gains exclusion of 500k for a married couple. Could that negate the benefit of the step-up in basis for inherited property?

 

[SecondCor521]

There is a onetime cap gains exclusion of 500k for a married couple. Could that negate the benefit of the step-up in basis for inherited property?

It doesn't negate it; it complements it. Both step up and cap gains exclusion are available and not mutually exclusive.

 

[G-Man]

It looks like a Medicaid Asset Protection Trust allows the parent to qualify for Medicaid as well as the property qualifying for a step-up in basis.

Medicaid Trusts and Step-Up in Basis

Learn what a Medicaid Asset Protection Trust (“MAPT”) is and whether or not assets in a Medicaid trust enjoy a step-up in tax basis at death.

burnerlaw.com

 

[G-Man]

I'm just trying to educate myself. Whether this is ethical or not, is another question.

 

[SecondCor521]

It looks like a Medicaid Asset Protection Trust allows the parent to qualify for Medicaid as well as the property qualifying for a step-up in basis.

Medicaid Trusts and Step-Up in Basis

Learn what a Medicaid Asset Protection Trust (“MAPT”) is and whether or not assets in a Medicaid trust enjoy a step-up in tax basis at death.

burnerlaw.com

I'm just trying to educate myself. Whether this is ethical or not, is another question.

The bigger question for me is whether or not the IRS will agree with Nancy Burner Esq.'s interpretation of tax law.

As one minor example, my Dad retains the right to trust income from a marital bypass trust set up by his estate planning attorney, yet that same attorney asserts that such trust will not be included in his estate and won't receive a step up in basis. While it is not a Medicaid Asset Protection Trust, these facts would tend to undermine Ms. Burner's assertion that:

"Assets in a MAPT do enjoy a step-up in basis so long as the grantor retains certain powers over the trust such that the trust assets are includable in the grantor’s taxable estate. The Internal Revenue Code sets forth specific powers that cause assets to be included in one’s estate (thus receiving a step-up in basis), such as if the grantor retains: (i) a limited testamentary power of appointment (i.e. the right to change the remainder beneficiaries of the trust property after death), (ii) the right to trust income, or (iii) the right to reside in real property owned by the trust."

-- from your link (second and third emphasis added by me)

 

[Lorenzo]

Just to add a footnote, this question appears to be directed to US law. In some other countries, there is no stepped-up basis rule, and the inheritance tax that would assessed on a property makes gifting the property to children while the parents are still alive a common way to transfer.

 

[pb4uski]

What is the best method for parents still living to transfer their home to their children? The children will sell the property once both parents pass away. The goal is to avoid any huge tax consequences such as capital gains when selling the property.

Here is an article that provides a few methods.

How Do I Transfer Property to a Family Member Tax-Free?

Giving your house to your children can have tax consequences, but there are ways to accomplish it tax-free. Here are four potential options to consider.

www.elderlawanswers.com

Any opinions on this topic?

IF the state that the house is in allows enhanced life estate or TOD deeds then an enhanced life estate deed or TOD deed is easy. Putting the house in a trust is also a great alternative.

Our Vermont summer home is an enhanced life estate deed. Our kids are the "remaindermen". We have an enhanced life estate that allows us to use the house, rent it and keep the rent, sell it and keep the proceeds (whcih we did with our Florida enhanced life estate property) etc... essentially all the rights and responsibilitis of owning... it is just that when the second of us dies that the property goes to the kids outside of probate... automatically... and it gets stepped up basis.

Our Texas home is similar but is a TOD deed.

Or put the house into a living trust.

 

[pb4uski]

Yes. This article explains the step up in basis for inherited property once someone dies. In the scenario I posted, the parents will transfer the property to their kids while they are still living in order to qualify for long term care assistance like Medicaid.

Giving Your Home to Your Children Can Have Tax Consequences

Giving away a house can have major consequences, involving gifts, capital gains, estate taxes, and more.

www.elderlawanswers.com

In this case, would putting the property in a trust (not sure what type of trust) be the best method to safeguard the property against the Medicaid 5 year look back rule as well as reduce the tax consequences when the kids sell the property upon the parents' death.

I'm just asking the questions to educate myself so please be nice. lol

There are probably schemes to do that but I think it is unethical. I'm not going to help you help your friends transfer their long term care costs to me and other taxpayers for the benefit of their kids.

Sell the house and use the proceeds to pay for your own long term care. If it ends up that they run out of money, then they can put thei hand out.

 

[pb4uski]

Not directly stated in the above comments: the surviving children MUST, as soon as possible after the death, get a professional appraisal on the house. That's the only way to substantiate the stepped-up cost basis of the inherited property. This is especially important if the children are to keep the house for some length of time.

We did this recently on my Mom's prorty after she died... a well-spent $800 to have good, credible suppo for the stepped-up basis. Not a good time to cheap out.

 

[G-Man]

There are probably schemes to do that but I think it is unethical. I'm not going to help you help your friends transfer their long term care costs to me and other taxpayers for the benefit of their kids.

Sell the house and use the proceeds to pay for your own long term care. If it ends up that they run out of money, then they can put thei hand out.

I appreciate your honesty and advice as always.

 

[jazz4cash]

It doesn't negate it; it complements it. Both step up and cap gains exclusion are available and not mutually exclusive.

Ok, poor choice of words on my part, but how could they be complementary? If the home is sold the exclusion applies. If it is inherited the step up applies.
My point was that if the gains are less than 500k keeping the home for the step up in basis seems redundent. The mistake that is often made is to put a younger family member on the deed to ease transition. That’s fine for accounts but not property.

 

[SecondCor521]

Ok, poor choice of words on my part, but how could they be complementary? If the home is sold the exclusion applies. If it is inherited the step up applies.
My point was that if the gains are less than 500k keeping the home for the step up in basis seems redundent. The mistake that is often made is to put a younger family member on the deed to ease transition. That’s fine for accounts but not property.

Complements in the sense that both are available. I understand your "either / or" idea. But it can be viewed as an "and": A person can sell home A and take the exclusion, then buy home B and die owning it and thus get the step up. Yes, only one or the other applies to each home, but both can apply to a taxpayer in their life.

 

[jazz4cash]

^Agreed.

 

[sakowitzm]

We did this recently on my Mom's prorty after she died... a well-spent $800 to have good, credible suppo for the stepped-up basis. Not a good time to cheap out.

Exactly. I did this when my wife passed, and used that figure when accounting for capital gains tax when I sold the house three years later.

 

[Brat]

My son and his wife made an offer on a house that belonged to a family friend, a widow. That family discovered that the widow, then senile, put the name of her children on the title. In the interim one of the children died with a surviving spouse. It was a mess to untangle the title.

Don't put the children on the title. Prepare a living trust and put the title of the house in the living trust.