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GIFT MEMO TO CLIENTS

GIVING AWAY REAL PROPERTY WHILE ALIVE REQUIRES CAREFUL CONSIDERATION AND THE ADVICE OF AN ATTORNEY

Our office is often asked to take someone’s name “off” the deed to real property, to add someone else’s name “on” to the title, or to “gift” a property to a child or other family member. While the title to the real property can often be changed, in many cases it is not a good idea. You need to carefully discuss the pros and cons in your particular situation, with your attorney. The following general rules should be understood:

Irrevocable/Subject to Creditors of New Owner(s):

Once a person is put on title to real property, that property cannot be taken back or given to another person by the original donor. If requires the consent of the gift recipient. Example: Mother adds son to the deed so that title is held by mother and son as joint owners, with right of survivorship. Two years later she has a disagreement with son and wants the title returned to her sole name. If son refuses to sign, she cannot change the portion of the property given to him. Mother can only change title to the portion of the property that she kept. Furthermore, son may lose rights to the property in a divorce or bankruptcy.

It is important to carefully consider:

  1. Your reasons for the transfer. If there is a possibility that you will change your mind, then a deed is not a good way to go. Instead, consider a will or trust, where you reserve the right to change your mind before you die.
  2. The possibility of legal problems in the lives of the children or recipient (divorce, bankruptcy, car accident). Remember that bad things happen to good and honest people, and the property may be lost to the creditors or spouses of the person you give the property to. The property is subject to the divorce or creditors of every owner.
  3. The transfer is permanent and cannot be revoked unless the recipient of the gift chooses to give it back to you voluntarily.
  4. You could be evicted from the property if the recipient decides that someone else should live there, if the recipient loses the property to a creditor, or if the recipient sells the property, for example, unless protections are put into place.
  5. If you want to keep your homeowner’s exemption for living on the property, you will need a recorded long-term lease as fair market value. The lease will also protect your right to live on the property. An alternative is to keep a life estate in the property, although a life estate is still subject to a Medicaid lien.

Taxable Gift

Changing title to real property is treated as a taxable gift. Taxable gifts are required to be reported to the Internal Revenue Service on or before April 15 for the preceding calendar year. In most cases, no tax is due because of the individual’s tax- free lifetime credit. However, a federal gift tax return (Form 706) must still be filed and the amount of the gift is deducted from the total amount you can pass on tax-free at death.

Capital Gains Tax Cost Basis

Further, there may be very significant tax advantages to receiving a property at death. If property is received as a lifetime gift, the recipient takes the donor’s cost basis. If property is transferred at death, the recipient gets a new cost basis equal to market value on the date of death. Therefore, when the property is sold, the recipient of lifetime gift may have a very large capital gains tax, whereas the recipient of the same gift at death will have little or no capital gains tax.

Medicaid

Gifting real property will disqualify you from Medicaid for 5 years, so be sure to consider your health and care needs before changing the title.

You can keep one piece of real property with equity up to $850,000 (your residence) and still receive Medicaid, so gifting is not necessary unless you have compelling reasons to engage in long term (i.e., greater than 5 years) planning for a high likelihood of needing Medicaid assistance for nursing home care.

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