Unfortunately, not all families get along. If you are having problems with one of your children, you may not want them to benefit from your estate. There are several strategies for dealing with an estranged child in your estate plan.
Before transferring your home to your children, there are several issues that should be considered. Some are tax-related issues and some are non-tax issues that can have grave consequences on your livelihood.
The first thing to keep in mind is that the current federal estate tax exemption is currently over $5 million and thus it is likely that you may not have an estate tax issue anyway. If you are married you and your spouse can double that exemption to over $10 million. So, make sure the federal estate tax is truly an issue for you before proceeding.
Second, if you gift the home to your kids now they will legally become the owners. If they get sued or divorced, a creditor or an ex-in-law may end up with an interest in the house and could evict you. Also, if a child dies before you, that child’s interest may pass to his or her spouse or child who may want the house sold so they can simply get their money.
Third, if you give the kids the house now, their income tax basis will be the same as yours is (the value at which you purchased it) and thus when the house is later sold they may have to pay a significant capital gains tax on the difference. On the other hand if you pass it to them at death, their basis gets stepped-up to the value of the home at your death, which will reduce or eliminate the capital gains tax the children will pay.
Fourth, if you gift the house now you likely will lose some property tax exemptions such as the homestead exemption because that exemption is normally only available for owner-occupied homes.
Fifth, you will still have to report the gift on a gift tax return and the value of the home will reduce your estate tax exemption available at death, though any future appreciation will be removed from your taxable estate.
Given the multitude of tax and practical issues involved, seek counsel before making any transfers of property. We are here to help you–just give us a call at (888) 829-0894.