Q&A: "What Are the Trade-Offs Between Gifting our House to our Children and Having it Pass to Them from our Estate? How can we Figure out Which Option is Best?"Estate Matters Tax
Question and background:
What are the trade-offs between gifting our house to our children and having it pass to them from our estate? How can we figure out which option is best for us?
My wife and I are fortunate enough to own a lovely home in Southwest Denver that we'd like to pass on to our oldest daughter. We'd like to gift it to her today, but we're wary about the taxes and penalties involved. While our expenses should be covered, we also wouldn't want to leave her in a situation where she has to sell the home when the time comes. Is there a way we can give her the home today? Or will she end up having to pay a bunch in taxes?
What a very generous idea! You're wise to check the pros and cons in advance.
I'll share some general thoughts here, but if you're inclined to move forward with the gift, you'll first want to consult an attorney in your state for specific advice and how to proceed.
You and your wife can each give up to $14,000 per year (2014 amount) to anyone without having to file federal Form 709 and claim part of your lifetime gift tax exclusion.
In 2014, your lifetime gift tax exclusion is $5.34 million each ($10.68 million for married couple). So even if you made a gift in excess of the annual exclusion and had to file Form 709, you have a lot of "gifting room" before taxes become an issue.
Generally, the donor is responsible for any gift taxes rather than the recipient. So your daughter should not have any worries on that front.
If you give the home to your daughter while you are alive, then your cost basis in the home transfers over to your daughter. On the other hand, if you die and bequest the home to her, the cost basis would be established at the date of your death. So if your home has appreciated significantly vs. your original cost (plus eligible improvements), there's a potential future tax trade-off in giving the home to your daughter now vs. bequesting it to her at your death.
Of course, if your daughter makes the home her principal residence--now or in the future--then she may be eligible in the future for the principal residence capital gains exclusion if she subsequently decides to sell the home. So it's not necessarily a reason to avoid the gift now, just something to be aware of.
I wasn't totally clear on whether you and your wife currently live in the home now or if it's a second home. If you currently live there and wish to continue--but want to gift the house to your oldest daughter--you may want to consider what's called a "Life Estate" arrangement. Essentially, you transfer ownership to your daughter, but retain the right to live there for the rest of your lives.
Gifting the home now would remove the home from your estate for probate purposes once you die. Also be aware, if you ever needed to tap Medicaid, there's a 60 month "look-back" period on gifted assets where your application would typically be denied if you gifted the home during that time.
Here are a few other thoughts and questions:
- How will your other child(ren) feel about this?
- If you transfer the home now to your oldest daughter, do you have other "equivalent" assets and resources that you'll transfer to your other child(ren)?
- Same question as above, if you wait and bequest the home to your oldest daughter once you've passed.
- You mentioned that your "expenses should be covered." What kind of analysis and projections have you run to determine that?
- Do you and your wife have adequate resources and/or long-term care insurance in the event you needed it?
Again, this is general information and not legal advice. Use these thoughts as a starting point for further consideration.
Hope that helps. All the best!