Is there a gift tax on real estate I give my children?

Q: Is a real estate transfer to my children while I am still alive subject to gift, estate or inheritance tax?

A: The transfer is subject to gift tax reporting, but probably not to any tax. Here's how it works: Each year you can give up to $12,000 per person ($24,000 for you and your spouse if married) that will be excluded from gift tax calculations. The amount by which gifts exceed the $12,000 is subject to reporting. However, there is no tax until all the gifts reported in your lifetime add up to more than $1-million. These reported gifts reduce your estate tax exclusion when you die. Whether you have any reason to be concerned depends on the overall size of your estate. For example, if you die this year, the exclusion is $2-million. If the property you gave away was worth $100,000, your exclusion would be reduced to $1.9-million. Only the amount above that would be subject to estate tax.

Note: Congress, in its wisdom has chosen to vary the estate tax exclusion from year to year. The estate tax is scheduled to go away in 2010 and return in 2011, but Congress will no doubt do some tinkering before then.

Donor-advised funds can be a great way to give

The fastest-growing forms of philanthropy is the donor-advised fund. These funds grew 25 percent last year, to $23.3-billion, according to a survey by the Chronicle of Philanthropy. The funds serve as conduits between donors and the charities they want to support. Why would you need one? Largely for the tax advantages, particularly if you want to use appreciated real estate, securities or an interest in a business to make your charitable contribution. Say you've got a piece of property you bought for $100,000 and you're going to sell for $500,000 and you'd like to give $100,000 of the proceeds to charity. You can give the donor-advised fund a one-fifth interest in the property before you sell it, avoiding capital gains on that amount. When you sell the property, the fund gets the $100,000 and you get the charitable deduction. The fund then holds the money until you instruct it to parcel it out to the charities of your choice. You could, for example, use it to pay $10,000 a year to your church for the next 10 years. Typically the fund would invest the money and as it grew, you would have even more to give to charity. It's a slick concept.

Tampa Bay donor-advised funds include the Community Foundation of Tampa Bay, Raymond James Charitable Endowment Fund, Pinellas Community Foundation and Christian Legacy Foundation. 

How do I transfer real estate to my kids?

Q: I have property in South Carolina that I would like to do a quick deed to children in New York.  How do I go about doing that?

A: Assuming that you own the property, you should give them a warranty deed, which needs to be recorded with the register of deeds in the appropriate county. Deeds must meet specific legal requirements, which you can read here. I recommend contacting a title company in the county where the property is located to assist you with the transfer. If it has a branch office in the area where you live, that will make the transaction even easier. Your children should get title insurance as part of the transaction to be sure they have a clear title.  A "quitclaim" deed is not recommended in a situation like this.

When you give property to someone else, you also give them your tax basis. If they sell, they will owe capital gains tax on the gain since you bought it. On the other hand, if you leave the property to them at your death, they will get a stepped-up basis in value to the date at your death.

New Medicaid rules for long-term care penalize gifts, reward people who buy insurance

Today's column takes a look at the new rules for qualifying for Medicaid in Florida. The primary goal is to make sure that the government doesn't pick up the tab for nursing home bills unless you really are poor. People who impoverish themselves by giving away assets will be disqualified (how long depends on how much you gave away). One way you can preserve more assets for your spouse or other heirs will be to purchase a new long-term care insurance policy that qualifies under the new "partnership program." Essentially you're allowed to keep assets matching the amount of benefits under the policy.

One note of explanation: The look-back period for transfer of assets is now officially five years rather than three. However, the longer period only applies to assets transferred after February 8, 2006, when federal law on the subject changed. Thus a three-year lookback will still apply until February 2009, when gradually it will be extended until it encompasses five years. Here's some discussion on this point. A five-year lookback is already in effect for asset transfers involving trusts.

Medicaid eligibility is administered by the Florida Department of Children and Families. Unfortunately, I've never found anyone there willing to discuss the subject with me. However, you might be able to get someone to answer your questions if you call 866-762-2237.

Here are the income and asset eligiblity requirements.

Don't savings bonds pass tax-free to heirs?

Q. In your column in the Money section on Sunday, you stated that if one held E or EE bonds that had matured until death, it was "sticking your  beneficiaries with the tax bill".   Don't E or EE bonds passed on  to beneficiaries get stepped-up basis and the accrued interest is therefore not taxed to benefciaries?'

A. No. Savings bonds do not get a stepped-up tax basis at death. Tax-deferred investments such as IRAs, annuities and savings bonds do not get a stepped-up basis at death. The beneficiary owes income taxes the same way the original owner would have owed them.

Million Dollar Gift Limit?

Q. Is the lifetime gift tax exemption $1-million each for a husband and wife ($2-million total) or could we each give $1-million to each of our four children ($8-million total?

A: It’s $2-million total, which does not include the $12,000 that you each are allowed to give to an unlimited number of people each year. And if you have that much money, you need to be talking to an experienced estate planning lawyer.

Should I give away this property or leave it in my will?

Q. I am 79 yrs old and own a piece of property in Maine valued at about $50,000, where a grandson and his family live (and love it). I pay taxes and insurance costs, which are no problem. Should I leave the place to him in the will or transfer it now?

A. If you're certain you want your grandson to have the property and you have no plans to use it yourself, I'd be inclined to transfer it now and let him take over the taxes and insurance costs. Of course you could continue to pay those items as a gift to him if you chose. One reason to transfer a property by will is that it will get a stepped-up tax basis to the current market value at your death. However, this is not an issue if your grandson plans to live there, since after two years of ownership, he'd be able to sell the property without any tax liability. You will need to file a gift tax form, but will not owe any gift taxes until your lifetime gifts exceed $1-million. Leaving the property to him by will also would be a bit more complicated since it would involve probate proceedings in Maine as well as the state you claim as your residence. You could use a trust, but under the circumstances, I don't think it would be worth the trouble.

The only reason I can think of not to give away the property is that the gift will affect your eligibility for Medicaid should you need to qualify for coverage in the five years after the transfer.

(Photo credit: Getty Images)

Can a widow be held responsible for her husband's debts?

Q. Would the widow of a deceased man be responsible for his unpaid debts even though they have been separated for the past 3 years? These are newer credit card debts on cards issued after their separation which she had no part of. They had been filing separate tax returns for those 3 years. And, if the credit card companies attempt to go after her for these debts, what should she do? He left no estate.

A.  His estate is liable, but if he died penniless, the widow doesn't have to pay the bills. The key point is that she had nothing to do with the credit cards--She wasn't a co-applicant or an authorized user and she doesn't possess items bought with the cards. If she gets a letter or phone call, she should immediately ask the debt collector to validate the debt--provide proof that she owes the money. (A credit card application she signed is an example of proof.) If the debt shows up on her credit report, she should dispute it through the credit reporting agency. If the debt is not removed from her report or if she is sued, it may be necessary to hire a lawyer to straighten things out.

Do I need a new will?

Q. My wife and I have both a will and a living will prepared by an attorney here in Florida. Is the will still valid or do we need a new one prepared by an attorney in Ohio?

A. When you move to a new state, you should always have your estate planning documents reviewed by a lawyer in that state. Simply moving to a new state does not invalidate your will. However, each state has its own rules for probate and using the right language can prevent potential problems for your beneficiaries. Just for example, states have rules about witnesses and who can serve as your personal representative or executor.

Life estates and homestead exemption

Q. Will I lose my homestead exemption if I set up a life estate deed for my property?

A. No. As long as you retain the right to live on the property for your lifetime, you will not lose your homestead exemption. You can find this in     Florida Statutes 196.041 (2).

However, I do not recommend the use of life estates. It really is simplest if you keep title in your own name.

Is a paralegal the same as a lawyer?

Q. My next door neighbor asked me as a favor to witness his signature for a will, power of attorney and trust. Instead of going to a lawyer, he went to a paralegal because it was cheaper. I would like to do the same, but I want to be sure that a paralegal is the same as a lawyer. Is it?

A. No. A paralegal is not the same as a lawyer. Personally, I would not take the chance of getting important legal documents from someone who is not a lawyer and who cannot give you legal advice without breaking the law. Here's what the Florida Bar says on the subject. The biggest problem with using a paralegal for estate planning documents is that you may not find out the documents are inadequate until it's too late - you're already dead and your heirs have problems with the handling of your estate.

How do I transfer stock ownership?

Q. My wife and I jointly own many shares of Ford stock. We would like to transfer or donate some of these shares to our grandson with his name as sole owner. If this can be done, what procedure do we have to follow?

A. It certainly can be done. If you held these shares in a brokerage account, you would simply go to your broker for assistance. However, it sounds as though you hold these shares in certficate form. That means you need to contact the transfer agent, which in this case is Computershare Investor Services. Here are their answers to some frequently asked questions about transfers and other subjects. By the way, if you did not know who the transfer agent was, the easiest way to find out is to go to the company Web site. From the home page, there's usually a place to click on "about our company," and from there you can find "investor Information" or some similar heading.

When you give your shares to your grandson, you also will be giving him your tax basis, so he needs to know what you paid for them. If they are worth more than $12,000, you and your wife need to file a gift tax form, splitting the gift. If the total is less than $24,000, it will not have any impact on your future gift and estate tax exemptions. Even if it is more than that, you would not actually owe any gift taxes until your lifetime gifts exceeded $1-million each.

(Photo credit: Getty Images)

Leaving your home to your heirs

Q. Within the past year or so you did a column on the little used conveyance of a home or real property using either POD or ITF.  I can’t find the article in my files.  I’ve tried to access the article by going to the St. Pete Times website and I pull up other articles by you but not this one.

A. You are remembering a column that I wrote about "Lady Bird deeds." This type of deed conveys the property to another person, but retains use of the property for life and most important, retains the right to revoke the deed. It is a version of the "payable on death" account and it is better than a traditional life estate. However, I do not recommend it. My recommendation is to leave the deed in your own name. Here's the article.

(Source: Getty Images)

Can I deduct a gift to my daughters?

Q. This year I bought each of my daughters an  automobile worth a little over $16,000. I am paying payments on them, but will not have them fully paid for before the end of 2006. My question is, can I count this a a gift to my children and deduct it from my taxable income? 

A. How lovely it would be if the IRS would subsidize gifts to our children. Unfortunately, gifts to individuals are never deductible, only those to IRS-recognized charities. In fact, quite the contrary. If you give away more than $12,000 to any one person in any one year, the IRS expects you to file a gift tax return (Form 709). If you are married, you and your spouse can elect to split the gift, which means it can be up to $24,000 before affecting your gift tax liability. However, you won't actually owe gift taxes. Amounts over $12,000 a year reduce your lifetime gift allowance of $1-million and your estate tax exclusion of $2-million. If the cars are titled in your daughters' names and the loan is in your name, then the gift is the full purchase price of the car. If the loan is in their name and you are giving them the money for the payments, future payments don't count as gifts until you've actually given them. It sounds as if your daughters have a very generous parent!

(Photo credit: Getty Images)

How do I title a house in joint ownership?

Q. I am wondering exactly how the title must read to provide " joint - tenancy." I know that our checking account must use the term "or" to allow us to use it as an individual, but am confused about the home title.

A. There are three basic forms of joint ownership for real estate. The preferred way to do this is to have the names (such as "John Doe and Jane Doe") followed by one of these designations:

Tenants by the entireties - a special form of joint ownership available only to married couples. The survivor inherits ownership when the other person dies.

Joint owners with right of survivorship - For those who aren't spouses. The survivor inherits ownership when the other person dies.

Tenants in common - When one person dies, his share of ownership passes to his beneficiaries under his will. It does not go to the other owner unless that's what the will says.

Will I owe tax on the house I inherited?

Q. My dad passed away, and my brother and I inherited his house. We are in the process of selling the house. This house is located in New York State, my brother lives in New York, and I live in North Carolina. Would we, he, or I be obligated to pay taxes on the sale of my father's house, that we own now? A. You and your brother will owe federal income tax on the sale only to the extent that the sale proceeds exceed the value of the house at the time of your father's death. If you sell fairly soon after his death, that should not be an issue.

Whether any estate taxes are due on your father's estate is a separate question. Assuming his estate is worth less than $2-million, there will be no federal estate tax. However, I cannot tell you anything about New York taxes.

Covering expenses for disabled adult child

Q. I have been providing my dependent disabled daughter with a condo where she lives alone. Her SSI benefit is reduced by one third for that very reason. It is financially impossible for me to continue paying the ever increasing expenses for property tax, monthly condo fees, insurance premiums, all repairs etc. Public housing (Section 8) has a long waiting list. Is there a way to eliminate the one third reduction of my daughter's benefit?

A. SSI is based on income and providing someone with a place to live is the equivalent of giving them income.That's why her benefit is reduced. You could talk to Social Security officials about whether you could come up with a way to charge your daughter rent that would qualify her for a higher benefit. You could put your daughter on the waiting list for public housing and explore whether other social services are available to assist your daughter (that's not my area of expertise).

In the meantime, I suggest that you consider finding a roommate for your daughter to help cover living expenses. Another alternative would be to sell the condo and have her move back in with you to reduce costs. You also might want to see a lawyer about setting up a trust on her behalf so that any money she inherits at your death would not disqualify her from benefits.

Taxes on an inherited IRA

Q. Can you tell me whether the value of an inherited IRA is subject to federal inheritence tax if it is taken in minimum mandatory withdrawals over the life of the person that inherits it?

A. Yes. The value of an IRA is included in someone's estate and, if the estate is large enough (more than $2-million), the estate will be subject to estate tax. When you take distributions from the IRA, you will have to pay taxes on them. However, you will get a deduction for the portion of the estate tax attributable to the amount of the distribution. This is a little complicated, so you should discuss the situation with the person preparing the estate tax return for the estate.