Impact on Taxes & Estate Planning

GIFT TRANSFERS

The recipient of real property by gift transfer receives that property at its carry-over cost basis. Capital gains taxes will be due upon sale, and are calculated on the appreciation over the adjusted cost basis in that property. If the transferee lives in the house and it is his/her primary residence for the required time period after acquiring title, the capital gains taxes may be excluded under federal law.

Some elders may seek to transfer their homes to their children who do not live with them. This means that if the property has a very low cost basis and a high current market value, the children will have a sizeable hidden potential income tax liability if they sell the house after the parent dies or moves out.

Transferring the property but retaining a legal life estate can avoid this problem if the property is held for the duration of the parent’s life, because the basis will “step up” to date-of-death value as a result of the retained interest in the property.

Rents received would be taxable income to the holder of a life estate.

A gift tax return has to be filed with the I.R.S. by the donor of the property to the extent that a donee’s share of the value exceeds that year’s exclusion amount. In 2020, the amount is $15,000. The maximum for excludable lifetime gifting is 11.58 million dollars (in 2020).

Gifts made within three years prior to the death of the donor will have to be reported on New Jersey’s Transfer Inheritance Tax Return and Estate tax Return, if the estate is required to file one.

REVERSE MORTGAGES

For elders of nominal means, the equity in their home may represent the only “bank account” they have should they need to make capital improvements, install equipment such as lifts or ramps, or hire a care-giver to live with them at home.

A reverse mortgage then can be an option to elderly homeowners, enabling them to draw down approximately 75% of the equity in their home on a periodic basis.

The loan is not paid back until the homeowner either moves out or dies. At that point, the home is sold and the loan repaid. These loans can be particularly important to elders who have no immediate family and are trying to remain in the community. The older the homeowner, the greater the amount of loan available.

All owners must reside in the home, and must be older than 55. The youngest owner’s age is used as the measuring life.

Transferring the primary residence eliminates this option, and also could result in loss of other benefits such as real estate tax exemptions.

THE IMPACT ON THE ELDER’S ESTATE PLAN

Not infrequently, an elder carefully explains that his/her desire is for the house and other property to be divided equally among all the children or some other group of heirs.

Upon examination, however, it sometimes turns out that the estate is mostly comprised of non-probate assets, which have somehow ended up disproportionately in the name of one or two members of the group, whether as co-owners or as pay-on-death beneficiaries. Sometimes this is intentional; the elder may want to leave everything to just a few, in the hope that they will “take care of” the others, or may want the whole group to divide the assets amongst themselves after the elder is gone.

As often as not, however, elders simply didn’t understand that by naming a beneficiary on a “P.O.D.” (Pay On Death) or “I.T.F.” (In Trust For) account, their Will would have nothing to say about that asset. This is also often the case with respect to joint ownership of real estate. As title is practically conclusive of ownership, and transfers between and among the class create gift and estate tax problems of their own, failure to carefully plan things out and failure to adjust the probate assets and non-probate assets could be creating problems that are perfectly avoidable.

Transfer of real estate to one member of the class may be an exempt transfer for Medicaid purposes. The elder needs to be advised, however, of the impact this may have on his or her overall estate plan so that appropriate adjustments can be made.

THE IMPACT OF PRESENT AND FUTURE LIENS AND MORTGAGES

Depending on the circumstances, a transfer of ownership could result in the calling of the mortgage on the property. Federal law bars a call of the mortgage when it is an intra-family transfer.

Title insurance ordinarily should be obtained by the new owner even when the property is received as a gift, because the transferor’s insurance will not carry over to the new owner.

Transfers can be made to avoid the risk of a Medicaid lien, provided that the transfer penalties are taken into account.