Q. If you want to add your children to the deed of your home, does it mean going through a closing or can you just do this via a will?
A. There are several ways you can give your home to your children, but be aware of all the consequences.
First, you can transfer your home to your children during your lifetime by recording a deed evidencing the transfer. Or you can transfer the home at your death by your will, and the executor will record a deed evidencing the transfer.
But only take these steps with caution, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.
“Because there are different tax and other consequences – such as Medicaid periods of ineligibility if a transfer is made within five years of applying for Medicaid – you should consult with an attorney before deciding which is best in your situation,” she said.
How you transfer the home also has tax consequences.
If during your lifetime you gift your house in its entirety to your children, then your children will take the house with your tax basis, referred to as a “carryover” basis, Romania said.
That means when they eventually sell the house, your children may pay capital gains tax on the difference between the net sales price and this basis increased by any improvements made to the home less selling expenses.
“On the other hand, if upon your death the house is included in your estate, the house obtains a `step-up’ in basis equal to the fair market value of the house,” Romania said. “Then when your children sell the property, they will only be subject to capital gains on the increase in value after the date of death.”
Romania said it is also possible to remain as an owner of the property while making a partial gift to your children.
One way to do this is by retaining a life estate in the property, which is a right to live there for your lifetime.
“This right has an actuarial value so if the house is sold during your lifetime, you would be entitled to a portion of the proceeds with your children receiving the remainder,” she said. “If you pass away while living in the home with a life estate, the home will be included in your estate in order to provide your children with a step-up in basis.”
Retaining a life estate also allows you to retain any real property tax advantages you are entitled to as a senior or veteran, Romania said.
Another way of making a partial gift of the home is to add your children to the deed as co-owners.
There would be no gift tax unless your cumulative lifetime gifts exceed the $11.18 million federal exemption, but a gift by a donor in excess of $15,000 per year – for other than educational or medical purposes – does require the filing of a gift tax return by April 15 of the year following the gift, Romania said.
In addition, if your children become the owners of the home, you should be sure they obtain homeowners insurance as the owners, she said.
Romania also said you should be sure to get some legal advice before any transfer if there are mortgages or liens on the home.
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