The Gift of Real Estate From Parent to Child
By Attorney Jeanette Dostie
Should I gift my house to the kids now, or leave it in my estate? This can be a tricky question, particularly if you live in Connecticut or Minnesota, the only two states left with a gift tax. There are also many other factors to consider, including mortgages, capital gains tax, Medicaid regulations, and other risks.
The current federal law gives each donor (maker of a gift) a $5.34 million life time exemption from the federal gift tax. The Connecticut statutes provide for a $2 million lifetime exemption from the Connecticut gift tax. Therefore, there is no gift tax due unless the donor has made more than $2 million in taxable gifts during his/her life.
Each donor receives a $14,000.00 annual gift tax exclusion per donee (receiver of a gift) for gifts of a present interest, meaning that the recipient can use and enjoy the gift immediately. For example, the exclusion for a gift from a parent to two children may total $28,000. If both the donor and their spouse join in the gift, the exclusion would be $56,000.00. That is, the value of the gift for gift tax purposes would be reduced by $56,000.00.
The $14,000.00 annual gift tax exclusion is not available for gifts of a future interest, such as a gift of real estate in which the donor reserves a life use. So, if your total estate is below the $5.34 million federal estate tax exemption and the $2 million Connecticut estate tax exemption, there is really no practical difference in this case.
Most mortgage documents prohibit the borrower from transferring an interest in the real estate without the lender’s written consent. To be assured of avoiding trouble with the lender, be sure to seek this consent before making a transfer.
A donor may have purchased real estate many years ago at a price that is much lower than the property’s current value. Because the gift recipient’s basis for capital gains tax purposes is the same as the donor’s basis, if and when the donee children sell the property, they could anticipate paying capital gains tax on a substantial gain.
By contrast, if the children were to inherit the property at the parent’s death, the children’s basis would be the fair market value of the property at the parent’s date of death. In that case, if the property were eventually sold, the gain upon which capital gains tax may be due would be much smaller than it would be if the property were received by gift and then eventually sold.
The current Medicaid regulations provide that if a person makes a gift of assets, and subsequently applies for Medicaid sooner than five years from the date of the gift, a period of ineligibility based on the value of the gift will apply. For instance, if a parent gifted real estate to a child on September 1, 2014, and the parent or the parent’s spouse needed to apply for Medicaid to pay for the cost of long term nursing home care prior to September 1, 2019, the parent or their spouse would be ineligible for Medicaid. Because of this five year look back rule, it is important to examine what other assets are available to pay for long term care.
What if your child passes away before you do? As much as we don’t like to think about these scenarios, this can be particularly problematic if the parent has not reserved a life use in the gifted property. In this case, the deceased child’s interest would pass under his/her own estate plan documents, possibly to a spouse or to the deceased child’s own children.
Other unexpected events such as bankruptcy, or an accident suffered by one of the donee children, or a divorce, could leave the gifted real estate vulnerable to claims of creditors or claims of the child’s spouse.
The long and short of this complicated discussion is that it is very important to consult with an experienced estate attorney before making the decision to gift property to your children.
Attorney Jeanette Dostie is a Director at Suisman Shapiro in New London, CT, the largest law firm in eastern Connecticut. She has a wide experience in estate planning, ranging from simple wills to complex estate plans designed to maximize estate tax savings for clients.