Family member wants to bequeath house...easier to be on title?

Question

Hey all,

Let's consider a scenario: An older family member is moving to town and buying a house. This person will put a significant portion (50%) down, so there will be plenty of equity in the property. This family member would like to pass the house to a specific individual, and not split it up amongst many children and grandchildren.

She is willing to include this individual's name on the title--but would carry the loan alone--if this would make it an easier transition and to obviate any death taxes. Does anyone know if this is beneficial or will the tax dogs come attacking regardless?

Aside from taxes, is there anything else the individual should know about the transition. Should the individual assume the loan or would a refi be necessary?

Hattie Dizmond · Answer

Place the property into a living trust with the person the owner wishes to leave the property to listed as the beneficiary.  The property simply flows to that person upon death of the owner, without disturbing the existing financing.  (Living Trusts are permitted under Garn-St Germaine and DO NOT trigger the due on sale clause as long as the borrower retains beneficial interest and the right to occupy the property.)  Using the living trust eliminates the need to probate the property, thereby avoiding the nasty tax fairy.  Also, simply having the other person's name on the deed does not prevent other heirs from contesting at least 1/2 of the property.  More troublesome, on death the lienholder can call the note due, and they will as soon as they receive the required death notice.  It can sometimes be negotiated, but it will be a problem that has to be dealt with.

Account Closed · Answer

That sounds like a thread I would participate in, but I'm way undereducated on gift and estate taxes.  I hope I didn't say anything definitive on triggering gift tax.  I'm totally unsure of which circumstances would necessarily trigger a gift tax when deeding directly to a beneficiary.

Rick H. · Answer

We need to be careful not to give anything that could be considered legal advice here. I think you've steered clear, however, being state specific and too fact specific, I'm in favor of guiding the OP in the direction of an attorney.

What gets tricky is that he wants to participate in the estate assets of yet another party, perhaps at the perceived expense of other family members.

As for Joint Tenancy, in my state a Joint Tenant can break the tenancy easily and unilaterally.

Tyler Blackwell · Answer

@Hattie Dizmond , it never occurred to me that if the older family member were still on the title after death that the rest of the family could vie for that share, essentially 50% of the property. Thanks for that tip. I was also a little concerned about the mortgage as well, but figured we could assume the note without too much trouble. We would also easily qualify for a refinance and we could rent the property for cash flow (we're landlords currently).

Kristine Marie Poe , It sounds like a living trust is something I need to look into,   and would be more seamless in terms of ownership as well as financing and addresses the senior's needs as well. Thanks for that.

This is what's great about BP--lots of great information that primes me so I can get legal/tax advice with a little bit of background. Thanks for the responses!

Dave Toelkes · Answer

@Tyler Blackwell

There are a couple of points in the previous responses that need clarification.

First, there are several ways to hold title to a property.  If the older person holds title in her name alone, then upon her death, title to the house would pass to her heir(s) in accordance with the terms of her will.  If she wanted to have a specific person inherit the property, then she should name that person in her will as the sole inheritor of the property.  A civil law attorney is well versed in all the specifics.  When there are multiple owners, state law varies on how ownership is to be interpreted.  In some states, if the deed names unmarried owners as joint tenants the ownership will be interpreted as separate ownership (tenancy in common).  Each individual is a co-owner of an equal share of the property that can be sold separately from the other owner's share.  In the event of one joint owner's death, that person's share of the property passes to his or her heirs in accordance with the terms of that person's will or the intestate laws of the state where the property is located.  However, the property will have to go through probate.  There are legal issues also to consider.   A joint tenant's interest in a property is also subject to creditor claims.  If one joint owner is sued or declares bankruptcy, that person's share of the property is exposed.

Joint tenancy with right of survivorship means that upon the death of one owner, title passes in its entirety to the surviving owner(s).  No probate required and a deceased joint owner's will does not apply to that property when estate assets are being distributed to other heirs.  In some state, the deed must specifically state that joint ownership is with right of survivorship to avoid probate and the provisions of any will.  In a few states, the state codes may direct that joint tenancy or joint owners without the right of survivorship clause means that right of survivorship applies between spouses, but not between unmarried co-owners.

Another legal barrier is the joint ownership (joint tenancy), once done, cannot be undone without the other owner's consent.  If to unmarried persons take joint ownership, but later have a falling out, the original owner can not remove the other owner from the deed with that person's consent.

Another concern is the age and health of the elderly family member contemplating this action.  If nursing home costs are being paid by Medicaid, then then any property transfer within a certain period of time (usually five years) can be voided and the property might be levied to pay nursing home bills.

The second question you ask is about  income tax liabilities.  For federal income tax purposes, any gifts of money or property to a single individual that totals more than $14K during the year do trigger a gift tax return for the giver (not the recipient).  Whether a gift tax is due depends upon that person's lifetime taxable gifts, but a gift tax return is still required.  In some states, gifts of money or property don't exactly follow the federal guidelines.  the sate tax code may specify different tax free gift threshholds that are a lot lower especially for total lifetime gifts.  Some states will even tax the recipient for inheritances.

One other adverse tax impact of adding a name to a deed, is the giver's tax basis for the property becomes the recipient's tax basis.  Upon death of the original owner, there is no step up in basis for the share of the property owned by the gift recipient.

Inheriting upon death by will or preferably as the alternate beneficiary of a trust preserves the step up in basis and is a much better estate planning strategy than simply adding a name to the deed.  Bottom line, not all state codes are the same.  Review your state codes to determine the full impact of any planned gift.

Colleen F. · Answer

yes, a gift tax is possible depending on how you structure it (and you need to look that up). Less then 13,000 I think you can give anyone in a year. Or over several years you can give that same amount each year to a lifetime maximum.  However the relationship of this person as a heir matters.  A spouse or child has different tax consequence they relatives that are more distant.  The living trust is definitely something to check out.

Once you get a basic idea of the option it would be worth it to talk to a lawyer.

NA Foster · Answer

Hello KMP-In a similar post several years ago you said something about the IRS might consider naming a person on title could trigger gift tax. Might the same occur here?

Account Closed · Answer

Assuming this person is not knocking on heaven's door in the immediate future, there are better scenarios that protect this person's equity.....for THEIR own benefit.  They may well need access to their equity in the next 10 or 20 years.  Living expenses, medical costs not covered by insurance/Medicare.  Home improvements or modifications.  These are all too common needs that seniors have.  At that point, the senior may benefit from a refi. Maybe even a reverse Mortgage.  IMO, a trust better addresses a senior's need to access equity but still put a sole beneficiary in place.

Dennis Lanni · Answer

you could also have them take title as joint tenants

Family member wants to bequeath house...easier to be on title?

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