elderly parent wants to sell house and give the proceeds to her children without penalting extra taxes?

Question

trying to not have them pay too much tax penalty. Parent does not want to show too much money.

Answer 1

There could be Gift Tax consequences in doing this. The better way would be for the parent to leave the home to the children in her will. The Estate Tax exclusion is higher than the lifetime Gift Tax exclusion so if her total lifetime gifts exceed $1 million, Gift Tax will possibly be due on all or part of the gifts. The children won't pay any tax, but she certainly could if the numbers are high enough.

If the parent is trying to shield assets in order to qualify for government-paid long-term care or other state assistance, disposing of the house will not help. Any disposal of assets within 5 years of applying for government assistance will be presumed to have been done to avoid using those assets for her own care; assistance will be denied until she has paid an equivalent amount for her own care first. If she has no money for this, you and your siblings will have to pitch in and pay the bills until the proceeds from the house are exhausted.

Answer 2

The greatest gift your grandparents could give you is placing the property in a living trust to avoid probate and estate taxes at the highest possible level. As the property passes to the recipients in the living trust, they get a stepped up basis on the property, which means the value of the property is passed to you without capital gains to the estate, and at the then market value, which means you are subject to standard real estate tax limitations, very beneficial to you the receiver of the property. I can explain this in more detail if you wish to contact me.

A simple will is a probate nightmare...which could lock up your assets for years in worst cases, not to mention the huge bite the IRS takes on estates over $2,000,000 currently, which is the current estate tax free limitation, going to $3.5 million in 2009, unlimited in 2010, and then reducing back to $1 million in 2011.

Another option is structuring a specialized trust into which the assets are transferred, and then the trust can gift the asset at the IRS limitation of $20,000 per year for each grandchild without gift tax impact, but this is critical to be done by an attorney who is an expert in this type of instrument.

Let's say the property is worth $500,000... and for the sake of argument that there are 5 grandchildren...that would give each of them $20,000 per year tax free for 5 years minimum, because the real estate will appreciate during that time, so there may be another $100-150K to gift...or another 1-2 years of gifting before the asset is fully liquidated. This would be more simply done if they sold the property, and assuming their gain is $500,000 or less, it's a tax free event for them, and they could simply give each that $20,000 per year of cash tax free for the gifter and the recipient.

If they are determined to give away the property now, another structure could be for the grandchildren to buy the house from the grandparents on a favorable deal of some sort, but there are things you must be very careful of in this situation as well. The upside is that they own the real estate, and could rent it out or one of them could live in it and become real estate investors, which is where real wealth is built...not with annual $20K gifts, but if they can receive the real estate as the gift tax free, they are still real estate owners and can turn that one property into real wealth over the next 10-20 years.

I would seek the advice of a skilled estate planner for the benefit of the entire family, so that as much of the value of the assets as possible stay in the family and avoid the grip of the IRS...it would be money well spent, but make sure you get a good referral from a trusted friend or relative.

Regards,
Robert Noakes
Real Estate Investment Consultant
Sr. Mortgage Planner
415.652.8112

Answer 3

This is a great question, and one that made me curious for quite a long time.