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10/11/12 It's The Law: Think Before You Deed

Question:

I want to add one of my children to the title to some real estate I own. I want to avoid probate and think this is an easy way to accomplish my goal. Do you see any problems with my thinking?

Answer:

Gifting someone an ownership interest in property for estate planning purposes is based on the belief that your plan will actually work. It overlooks or dismisses potential problems. Before proceeding any further, I ask that you consider the following.

One of the first “problems” to consider is that a federal gift tax return is required to be filed for gifts of more than $13,000.00 in any one year. Although there are lifetime credits that may eliminate the need to pay any tax with the return, the gift will likely reduce the amount of assets which you can leave at death without paying estate tax because lifetime gifts of more than $13,000.00 per year are generally deducted from your estate tax exemption amount.

A gift of an interest in real estate is not necessarily free. If there is a mortgage on the property, Florida law requires payment of documentary stamps on the deed (even a quit claim deed) as if the recipient paid the grantor an amount equal to the proportional amount of the mortgage on the property. The rationale is that with the ownership interest comes a proportion of the mortgage and the recipient is relieving the grantor of liability for that portion. Documentary deed stamps in Florida are calculated at $7.00 per $1,000.00. That can get expensive in the gift scenario and the Department of Revenue will tack on penalties and interest if the tax is not paid at time the deed is recorded.

Adding someone to the title can complicate ownership and management. The new owner will have to sign a mortgage if the property is refinanced. Other legal documents affecting title will require the signature of all owners. And, the new owner shares liability for any claims against the property, including anyone injured on site.

What if the new owner does not cooperate? I am sure your children are wonderful and will always do what you ask, but some of the other children in the world have deviated significantly from that path.

If your child ends up with tax or creditor problems, you may find the government or creditors filing liens against the property and attempting to force sale. Even the best of us can face an unexpected and extremely large creditor if we are responsible for a motor vehicle accident.

The new owner can also sell his or her interest to a third party without your consent. That may seem unlikely, but would not be possible if you did not add your child to title.

The gift can affect your eligibility for Medicaid assistance for long term care. Generally, owning a home does not disqualify you from Medicaid assistance. But, gifting the property or an interest in the property for less than fair market value can make you ineligible for Medicaid assistance, with length of the ineligibility varying depending on the amount of the gift. Any gifts made within 5 years of your application for Medicaid long term care assistance count towards that ineligibility period.

Depending on how you title the property, Florida’s Homestead tax break and the Save Our Homes tax cap may be reduced.

Last but not least is the income tax impact gifting may have on your child compared with inheriting the property. If your child inherits property from you, the property is valued as if the child bought it for what it was worth at time of inheritance. When the property is sold, the child will calculate profit as difference between sale price, less cost of sale, minus value of the property at the time of inheritance.

Gifted property is more complicated. Generally, the recipient of the gift is treated as if he paid what the donor paid for the property. If the donor has depreciated the property, the recipient “pays” that depreciated value (known or basis). When the property is sold, profit or gain is calculated by subtracting the calculated basis.

If the property is sold at a loss, it gets worse. The gift recipient is treated as having paid the greater of adjusted basis of the donor or market value of the property at time of the gift. In effect, the gift recipient pays the maximum possible tax on any gain and gets the benefit of the smallest possible loss on any asset that depreciates in value.

Adding children to title is done all too often without thinking. Title companies and even office supply stores can provide quit claim deeds and the unsuspecting parent may be creating a time bomb for all parties. Before proceeding with your plan, I suggest you speak with an experienced attorney.

By: William G. Morris, Esquire

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