My bf’s parents somehow want to transfer their home to him before they die; they’ve known two inheritors who were wiped out by inheritance taxes, so they don’t want to simply will it to him. It’s just a tiny little house, but it’s nearly 90 years old and sits on three large lots that they’ve extensively landscaped.
They can’t just give it to him, because then they run into the windfall/gift tax situation. Is there any legal way for them to transfer the deed, or to put him on it with a “right of survivorship”?
yes, you need a lawyer but just so you have some ideas: parents can give their children $10000/year tax free, which makes 20000 between the two of them. They can give him $20000 share of the house tax free every year until the end of their lives. That should take care of a good chunk. When they die there is an amount which is free from taxes so that can take care of another big chunk. Then you have to see if what is left is worth creating a trust or other mechanism. If his parents are worth millions then it probably is but only a specialised attorney can tell you. If the estate is worth under a million then just yearly gifts can do the trick. Of course, they should be aware that they are giving him the stuff and it is his at that point. Some parents might not feel comfortable doing this.
By that logic, anything sold under market value could be taxed as a ‘gift’. I can’t believe that’s true - if you want to sell something cheap, you can. It shouldn’t matter if it’s sold to one’s children or a complete stranger.
Why shouldn’t it matter? The opportunities for abuse are obvious if transactions at notional values betwen related parties are treated one way, and gifts another.
You should definitely consult a local attorney, but the IRS will look askance at a sales price which is substantially below the market value. One way to deed the property during one’s lifetime and still stay on the property is to reserve a life estate in favor of the grantor. A land trust is another way. There are several avenues open to accomplish all the aims you seek, and a local attorney who’s familiar with your local law will advise you as to the best.
I read you can Contact your local bar assn, ask for a referral for a lawyer consultation, they usually have someone who does it for $25 for a half hour, no promises…also try nolo.com (Nolo Press) they have alot of law books you can read that are very simple to read.
Yes it would. Why would you sell something below market value unless you mean it as a gift? Would you sell me your house for $1000 when you could sell it on the market for $250,000?
Athena, If you sell a house way below market price the difference between the sale price and the market value is taxed as a gift. You know why? Because it is a gift! Welcome to the real world. (Or at least the world of the IRS)
To answer the OP. The house itself is not as important as the value of the entire estate. If you are talking millions then quit wasting time here and consult an attorney who specialises in estate planning.
If it is just the house and worth a few hundred thousand at the most it will probably be exempt as I believe the exemption for estate taxes now is 650K (if it has not gone up).
And, as I said parents, between the two of them can donate $20,000/year to each child free of taxes.
They could sell the house to the son and take back a mortgage which would be paid at $20,000/year which would then be forgiven as a gift. The debt remaining at death would be part of the estate.
I do not know that many parents would be comfortable giving the house to the kids and living at their sufferance. Next thing you know the kids ship you off to a retirement home.
They certainly aren’t worth millions (financially, anyway). They bought the place seven years ago for $41,000. Of course, at that time it need SUBSTANTIAL work, which they’ve done. The lots are worth more than the house, even so. I’d guesstimate the whole place, land and house, to be worth under a $100,000.
Rest assured, they trust their son, who is a good man. No retirement home for them!
I know they need to consult an attorney, I was just trying to get a feel for the possible solutions.
This is the part that is confusing me. The federal estate tax really shouldn’t wipe out the people who receive assets from an estate, though it can do some damage to the estate itself. Was it state taxes that “wiped out” these people?
The parents really need to deal with someone knowledgeable about state and federal laws regarding estates. DIY “fixes” can cause more trouble than people were trying to avoid in the first place. And they need to make sure the understand the effects of their plans. A right of survivorship won’t mean that the property passes tax free, but it does mean that ownership will change without need for a will. For example, a couple with significant assets held as stocks arranged through a will to use those stocks to fund trusts after they died. The estate planner did not look at the stocks closely - all of them were held with a right of survivorship. When the people died, the right of survivorship kicked in and changed ownership, therefore the will was meaningless and the trusts went unfunded.
Also, it’s important to remember that legislatures go to great lenghts to prevent tax-free transfer of significant assets. Most of the ways that exist to minimize taxes take many years to complete.
Sailor, you’re assuming that the house is the only significant asset of the parents’ estate. That may or may not be true. I agree with the previous suggestion that the parents consult a tax attorney, or alternatively an estate planning attorney. I am an attorney, and I wouldn’t prepare an estate plan without talking to one of my partnets in this area. In fact, when I did my parents’ estate plan, I did just that.
If you follow Handy’s “advice”, please keep me in mind for the necessary litigation in the (likely) event that the estate plan gets screwed up.
In defense of the house, it’s a historic Victorian and they’ve done, as I said, substantial repairs and upgrading. The land is worth more than the house, and none of us want to see someone else get it and raze it to cram four modern monstrosities in there.
They will get an attorney–but are inheritance taxes a certain percentage of the value of the estate?
As far as the inheritors who lost the inherited properties through estate taxes–if you inherit a house worth, say, $100,000, and the inheritance taxes are $10,000–well, that’s a lot of money to some people (including us) and we just wouldn’t be able to come up with it. Then the house would go on the market and, not being able to buy it, he’d lose it.
Ok Squish, I see what you are talking about. There are two taxing schemes that concern you. Most of the responses to this thread have covered the federal system, but unless your parents have significant assets (let’s say about one million or more), then the federal tax isn’t an issue. Your concern seems to be with state taxes. The feds go after the estate, states like to take the money from the people who get what’s left of the estate. You might find that methods that minimize federal taxes don’t help you with state taxes.
As an aside, if you’re in a cryopod on the LEXX, doesn’t that suggest that you are already dead?
They bought the place seven years ago for $41,000. Of course, at that time it need SUBSTANTIAL work, which they’ve done. The lots are worth more than the house, even so. I’d guesstimate the whole place, land and house, to be worth under a $100,000.