Q. What are the pros and cons of adding adult children to a home deed?
A. There are plenty of both.
By adding the name of an adult child on a deed, the parent is making a gift of an interest in that property to the child, said Shirley Whitenack, an estate planning attorney with Schenck Price, Smith & King in Florham Park. If the conveyed interest is more than $14,000, a federal gift tax return should be filed. However, no federal gift tax will be due unless the parent has given away more than $5.43 million in his or her lifeftime, Whitenack said.
New Jersey does not impose a gift tax, she said, but you do have to consider the estate tax.
“New Jersey imposes an estate tax on estates valued at more than $675,000, including the value of the home,” she said. “When the parent’s estate may be more than $675,000, gifting an interest in the home is an easy and inexpensive way to reduce the taxable estate.”
Let’s get into greater detail.
If your children’s names are added to the deed as tenants in common, upon your death your estate must be probated (if you have a will) or administered (if you have no will), and a new deed from the estate to your children must be recorded in order to pass the remaining interest held by you to them, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
“If your children’s names are added to the deed as joint tenants with rights of survivorship, the property will pass to them automatically, by operation of law, without the need for probate/administration or another deed being prepared,” she said. “However, regardless of whether the property is part of the probate estate, it may be part of the taxable estate.”
To the extent you do not receive adequate consideration — such as a payment equivalent to the value of the interest transferred — when you place your children on the deed to the home, you may be making a gift to the child of an interest in the property, Romania said.
A gift of property greater than $14,000 per donee — or $28,000 if a husband and wife agree to split the gift — per year will trigger the requirement of a gift tax return filing.
“Although tax may not be due as the federal gift and estate tax exemption allows you to transfer property valued up $5,43 million without incurring a tax, a gift tax return will be due by April 15 of the calendar year following the year of the gift, unless an extension of time has been obtained prior to such date,” Romania said.
To the extent you gift the property to your children, your children will take the property with a carryover basis, which is the same as your basis. Your basis is equal to your purchase price plus the cost of any capital improvements on the property.
“When the asset is sold, they will pay capital gains tax on the difference between their share of the net sales price and their basis,” she said. “If they do not live in the home, they will not qualify for the $250,000 per person personal residence exclusion.”
You, on the other hand, are able to obtain such exclusion but only to the extent you own the home, she said.
Additionally, upon the sale of real property to a third party, a realty transfer fee must be paid by the seller. That fee is reduced for senior citizens. To the extent your children who are not seniors are owners, the reduction is not permitted, she said.
Alternatively, if the property is part of your estate and passes to your children at your death, the property obtains a “step-up” in basis equal to the fair market value at the time of death,” Romania said. Then when your children sell the property, they will only incur capital gains on the increase in value after the date of death.
“Property is included in your estate not only if it is titled in your name, but also if you can exercise control over the property which control ends only upon your death,” she said. “Thus, for example, notwithstanding that you transfer the home into the names of your children, if you retain a life estate providing you with the right to live in the home for life, the property will be included in your estate and receive the benefits of a step-up in basis.”
A similar result will be incurred if you transfer only a partial ownership interest in the property but maintain control and continue living in the home without payment of rent, she said.
And as long as you remain on the deed, either as a partial owner or by retaining a life estate, you will still qualify for property tax benefits such as freezes or reductions allowed for senior citizens or veterans, Romania said.
Another option is to sell your children a portion of the personal residence. In that case, the children receive a basis in the property purchased equal to the payment rendered, she said. Provided your gain on the sale is less than the $250,000 personal exemption, you will have no income tax consequence. A transaction can also be characterized as part sale, part gift, to the extent the payment is substantially less than the market value.
Putting aside tax considerations, retaining a life estate in your home, regardless of whether the transfer of title to the children is by gift or sale, ensures that you have the legal right to remain in the home as long as you desire without the need to pay rent, Romania said. If you should choose to leave the home before death, upon the sale of the home, you would be entitled to a payment for relinquishing your life estate, which is based upon the sale price and your remaining life expectancy.
Medicaid is something to be considered, too.
“Medicaid has a five-year lookback and will impose a penalty based on the value of property transferred for less than adequate consideration within five years of applying for Medicaid,” Romania said. “The penalty is the number of months which you will be ineligible for Medicaid.”
So if your reason for the transfer is to potentially qualify for Medicaid at some time in the future, the transfer must be made at least five years prior to eligibility or be subject to a penalty, she said. A personal residence owned by you and to which you intend to return is deemed a non-countable resource for Medicaid purposes such that ownership will not result in ineligibility.
If you plan to stay in the home, adding your children to the deed — however you do it– could mean you won’t ever qualify for a reverse mortgage, Whitenack said.
Before you make any move, talk to an estate planning or elder law attorney who can evaluate your specific circumstances.
Email your questions to moc.p1537314150leHye1537314150noMJN1537314150@ksA1537314150.