Estate planning options for real estate
October 30, 2021 11:44 AM Subscribe
My mother is in her 60s and would like to put her two houses in my name (or most importantly - get them out of her name). What are the main ways we can do that? E.g. different types of trusts (what types?), putting the properties in my name directly, putting the properties in a business entity I/we control, anything else? I will 100% absolutely positively get a lawyer, I'm just here to understand big-picture options going into that conversation.
The properties are the bulk of her net worth and she would like to avoid losing them if she needs to do a Medicaid spend down in the future. She's also concerned about becoming financially vulnerable as she ages. She can be an erratic decision-maker and she is kind and generous to a fault - I'd say she's already at risk of becoming a victim of fraud.
So, I agree that it is in her best interest to move the houses out of her name. However, putting them in my name directly concerns me - I primarily worry about being liable for something catastrophic at the house and/or with the tenants. I'd also like to understand the tax consequences of the different options.
Other things that may be relevant:
-She rents one house out to multiple tenants, total real estate value is <$1mm, and she has either no debt or a small HELOC on one
-My mom still works, but will not be able to indefinitely. She'll be eligible for Social Security and she could likely cover her living expenses with either that or her rental income.
-As long as she's able, my mom will continue to make financial decisions independently, but she's fine if major decisions need to go through me. And I'm happy to be hands off even if I don't agree with her for as long as she seems sound-of-mind.
-I have one sibling, and my mother wants us to split her estate. If there's a way to work that into our solution that's great, but we'll consider informal agreements (or other contractual agreements? is that a thing?) as well. If my mom were to pass away, I would work with my sibling to divide her estate per her wishes no matter how the assets were held, and I would categorically trust my sibling to do the same.
-I live a few hours away by car, my sibling is much closer. My sibling will very likely be helpful and supportive, and will be involved in the planning and decision-making process.
The properties are the bulk of her net worth and she would like to avoid losing them if she needs to do a Medicaid spend down in the future. She's also concerned about becoming financially vulnerable as she ages. She can be an erratic decision-maker and she is kind and generous to a fault - I'd say she's already at risk of becoming a victim of fraud.
So, I agree that it is in her best interest to move the houses out of her name. However, putting them in my name directly concerns me - I primarily worry about being liable for something catastrophic at the house and/or with the tenants. I'd also like to understand the tax consequences of the different options.
Other things that may be relevant:
-She rents one house out to multiple tenants, total real estate value is <$1mm, and she has either no debt or a small HELOC on one
-My mom still works, but will not be able to indefinitely. She'll be eligible for Social Security and she could likely cover her living expenses with either that or her rental income.
-As long as she's able, my mom will continue to make financial decisions independently, but she's fine if major decisions need to go through me. And I'm happy to be hands off even if I don't agree with her for as long as she seems sound-of-mind.
-I have one sibling, and my mother wants us to split her estate. If there's a way to work that into our solution that's great, but we'll consider informal agreements (or other contractual agreements? is that a thing?) as well. If my mom were to pass away, I would work with my sibling to divide her estate per her wishes no matter how the assets were held, and I would categorically trust my sibling to do the same.
-I live a few hours away by car, my sibling is much closer. My sibling will very likely be helpful and supportive, and will be involved in the planning and decision-making process.
I am not an accountant or lawyer. I do tax returns for people who own rental property as part of my volunteer work. I know very little about real estate laws, estates, etc. I am talking mostly about income and property taxes here:
This is a gift to you and there are tax consequences
Not for the person getting the gift, and not for the person giving in the amounts being mentioned here because of the $11.7 million lifetime exclusion at the Federal level. This will trigger a reporting requirement, though. Your state may have different rules, and if you live in different states, you want to consult someone in both. You do need an accountant or for the estate lawyer to provide assistance or advice in filing that gift return for you mother in the year after she transfers the property. All of that is for your mom.
For you, if you end up owning a rental home yourself (not in a trust or LLC), you will need to file that income on your own taxes even if it goes to your mother. It's not too complicated and you can deduct expenses. Once you have an accountant do it for a year, you will probably be okay filing yourself after that if you do so currently. If she stops working, it may make sense to claim her as a dependent if that income is providing more than 50 percent of her living expenses, but there are many other things involved in that decision. For the person who ends up owning the home she lives in, check to see if that will change the property tax situation. Some states increase property taxes on second homes and some offer a reduction (from the increased amount) if a relative lives there. If that home is not paid off and mom keeps paying the mortgage, then that is "rent" she is paying the owner. So, it is income on the tax return that is totally offset by the expense of the mortgage payment. You only have to pay tax on the profit you make, so if it nets out to zero or negative, this will not increase your tax bill.
In both cases, you should be able to claim property depreciation as an expense on your taxes if you are claiming rental income (and possibly other things like property tax and tax prep fees). This seems daunting but is not so bad once you have a year or two of examples to copy forward. I have a similar plan set up with my parents and siblings and I am going to push for an LLC type of set up so we can manage the properties together, pool expenses, pay them from the income, and keep our own personal returns simple.
posted by soelo at 12:47 PM on October 30, 2021 [1 favorite]
This is a gift to you and there are tax consequences
Not for the person getting the gift, and not for the person giving in the amounts being mentioned here because of the $11.7 million lifetime exclusion at the Federal level. This will trigger a reporting requirement, though. Your state may have different rules, and if you live in different states, you want to consult someone in both. You do need an accountant or for the estate lawyer to provide assistance or advice in filing that gift return for you mother in the year after she transfers the property. All of that is for your mom.
For you, if you end up owning a rental home yourself (not in a trust or LLC), you will need to file that income on your own taxes even if it goes to your mother. It's not too complicated and you can deduct expenses. Once you have an accountant do it for a year, you will probably be okay filing yourself after that if you do so currently. If she stops working, it may make sense to claim her as a dependent if that income is providing more than 50 percent of her living expenses, but there are many other things involved in that decision. For the person who ends up owning the home she lives in, check to see if that will change the property tax situation. Some states increase property taxes on second homes and some offer a reduction (from the increased amount) if a relative lives there. If that home is not paid off and mom keeps paying the mortgage, then that is "rent" she is paying the owner. So, it is income on the tax return that is totally offset by the expense of the mortgage payment. You only have to pay tax on the profit you make, so if it nets out to zero or negative, this will not increase your tax bill.
In both cases, you should be able to claim property depreciation as an expense on your taxes if you are claiming rental income (and possibly other things like property tax and tax prep fees). This seems daunting but is not so bad once you have a year or two of examples to copy forward. I have a similar plan set up with my parents and siblings and I am going to push for an LLC type of set up so we can manage the properties together, pool expenses, pay them from the income, and keep our own personal returns simple.
posted by soelo at 12:47 PM on October 30, 2021 [1 favorite]
she would like to avoid losing them if she needs to do a Medicaid spend down in the future.
I looked into this for my mother recently. The rules are somewhat complicated, so it may be most efficient to start consulting with an attorney earlier rather than later. No point in dreaming up a scenario about what to do, only to have it turn out unworkable when you talk to somebody who knows the Medicaid & related rules.
In any event, whatever you do, needs to be completed 5 years before you need to rely on it, or the government will be able to look back and undo whatever you did. So you need to plan further in advance than you might have expected.
You'll be looking for an elder law attorney with Social Security, Medicaid and estates & trusts knowledge.
posted by spacewrench at 1:22 PM on October 30, 2021 [9 favorites]
I looked into this for my mother recently. The rules are somewhat complicated, so it may be most efficient to start consulting with an attorney earlier rather than later. No point in dreaming up a scenario about what to do, only to have it turn out unworkable when you talk to somebody who knows the Medicaid & related rules.
In any event, whatever you do, needs to be completed 5 years before you need to rely on it, or the government will be able to look back and undo whatever you did. So you need to plan further in advance than you might have expected.
You'll be looking for an elder law attorney with Social Security, Medicaid and estates & trusts knowledge.
posted by spacewrench at 1:22 PM on October 30, 2021 [9 favorites]
Agree that you should talk to someone familiar with the law here. We have talked about similar issues in our family and there are several solutions with varying levels of tax burden, reporting requirement, etc. For instance it may be that the property should live in a trust rather than directly changing ownership to you, etc. I think it will be no problem as this is a common thing, just better to pay a couple hundred bucks up front to get it right the first time!
posted by BlackLeotardFront at 2:12 PM on October 30, 2021 [1 favorite]
posted by BlackLeotardFront at 2:12 PM on October 30, 2021 [1 favorite]
From personal experience, you need to consider not just your mom dying, but also her becoming mentally incapacitated and needing a guardian. This is a problem that created a three-year nightmare for me. A specialist lawyer will probably think of it, but I am on a mission to make sure everyone knows an antagonistic guardian can make your life hell. It would be you or your sibling, who it sounds like you can trust, but it's best to have everything in writing.
posted by FencingGal at 2:16 PM on October 30, 2021 [6 favorites]
posted by FencingGal at 2:16 PM on October 30, 2021 [6 favorites]
>> This is a gift to you and there are tax consequences
>Not for the person getting the gift,
Don't make the mistake of assuming that the gift tax is the only possible tax consequence. It is my understanding that in the US, sale of an appreciated asset can trigger capital gains taxes on the appreciated value. Some methods of transfer of ownership do not reset the basis, meaning that should your mother gift the house to you before her death, and you sell it after her death, you could owe taxes on the gains calculated from your mother's original purchase price. When the transfer is part of an estate (after death), the basis resets to the current value, meaning that if you were to sell the house, you would only owe taxes on the gains calculated from the value at the time of her death.
It's possible that the capital gains tax consequences are dwarfed by the medicare eligibility, or that certain ownership structures allow the best of both worlds. I know from looking at property records that in my state, a lot of homes are owned through a trust. It is my understanding that different trust structures (revocable versus irrevocable) are viewed differently by Medicaid, but also carry different real-world consequences, especially if your relationship with the trustee changes. But as always, consult a professional licensed in your jurisdiction, as I'm just an internet stranger doing google searches, and each jurisdiction may be different.
And regardless of whatever you do with the assets, your mother should absolutely set up a Durable Power Of Attorney. My parents had this done by a local lawyer at the same time they re-did their wills and living wills, and when my father's mental health declined, it was a godsend that the structure was already in place such that all my mother had to do was get a letter from his physician to trigger the POA. The same document would have flowed through my mother on to me or my siblings (in a specified order) should she have become incapacitated, and my mother has one of her own that I expect I'll be using in due time. Having it all set in place before there was any pressing need made everything so much easier.
posted by yuwtze at 4:09 PM on October 30, 2021 [1 favorite]
>Not for the person getting the gift,
Don't make the mistake of assuming that the gift tax is the only possible tax consequence. It is my understanding that in the US, sale of an appreciated asset can trigger capital gains taxes on the appreciated value. Some methods of transfer of ownership do not reset the basis, meaning that should your mother gift the house to you before her death, and you sell it after her death, you could owe taxes on the gains calculated from your mother's original purchase price. When the transfer is part of an estate (after death), the basis resets to the current value, meaning that if you were to sell the house, you would only owe taxes on the gains calculated from the value at the time of her death.
It's possible that the capital gains tax consequences are dwarfed by the medicare eligibility, or that certain ownership structures allow the best of both worlds. I know from looking at property records that in my state, a lot of homes are owned through a trust. It is my understanding that different trust structures (revocable versus irrevocable) are viewed differently by Medicaid, but also carry different real-world consequences, especially if your relationship with the trustee changes. But as always, consult a professional licensed in your jurisdiction, as I'm just an internet stranger doing google searches, and each jurisdiction may be different.
And regardless of whatever you do with the assets, your mother should absolutely set up a Durable Power Of Attorney. My parents had this done by a local lawyer at the same time they re-did their wills and living wills, and when my father's mental health declined, it was a godsend that the structure was already in place such that all my mother had to do was get a letter from his physician to trigger the POA. The same document would have flowed through my mother on to me or my siblings (in a specified order) should she have become incapacitated, and my mother has one of her own that I expect I'll be using in due time. Having it all set in place before there was any pressing need made everything so much easier.
posted by yuwtze at 4:09 PM on October 30, 2021 [1 favorite]
Definitely talk to a lawyer who is familiar with trusts, estate planning and also Medicaid requirements. It will cost money but it will, hopefully, make things much easier to manage as your mother gets older and less capable of handling her own affairs and also has the potential of protecting her assets so there might be something for you and sibling to inherit.
I know for example, there are special needs trust that are designed to give people with disabilities access to funds without impacting their ability to qualify for public support. There may be a way that she can put the real estate in an irrevocable trust that allows her to use the income from the properties during her life time but she no longer owns the underlying assets. But whether that actually works for Medicaid depends on so many things that you need an legal expert to advise you.
posted by metahawk at 8:29 PM on October 30, 2021 [1 favorite]
I know for example, there are special needs trust that are designed to give people with disabilities access to funds without impacting their ability to qualify for public support. There may be a way that she can put the real estate in an irrevocable trust that allows her to use the income from the properties during her life time but she no longer owns the underlying assets. But whether that actually works for Medicaid depends on so many things that you need an legal expert to advise you.
posted by metahawk at 8:29 PM on October 30, 2021 [1 favorite]
If you search on Medicaid Trust, you can quickly get an idea of what this might look like and some of the cautions that should be considered before setting one up.
Also, as her daughter, you might want to encourage your mother to hold onto enough income flow that she can have a comfortable retirement. Not everyone needs a budget-busting, full-service nursing home beyond the short-term recovery stay provided by Medicare. If she can afford to get into a good assistive living situation as she ages, she may be much happier AND spend less money on care as she moves into her final years. You said that she could probably get by on either her social security or her rental property income. If she has both income streams, she might have a very much better quality of life in her final years, while still protecting the underlying assets by putting them into the trust. (INNAL but my understanding is that the principal in the trust has be held for the eventual beneficiaries - you and your sister - but your mother may be able to draw on the income as long as she doesn't touch the principal - but ask a real lawyer)
posted by metahawk at 11:53 PM on October 30, 2021
Also, as her daughter, you might want to encourage your mother to hold onto enough income flow that she can have a comfortable retirement. Not everyone needs a budget-busting, full-service nursing home beyond the short-term recovery stay provided by Medicare. If she can afford to get into a good assistive living situation as she ages, she may be much happier AND spend less money on care as she moves into her final years. You said that she could probably get by on either her social security or her rental property income. If she has both income streams, she might have a very much better quality of life in her final years, while still protecting the underlying assets by putting them into the trust. (INNAL but my understanding is that the principal in the trust has be held for the eventual beneficiaries - you and your sister - but your mother may be able to draw on the income as long as she doesn't touch the principal - but ask a real lawyer)
posted by metahawk at 11:53 PM on October 30, 2021
Peruse the resources identified above, to become a more knowledgeable client. Then consult with a qualified elder law lawyer. You can find one here.
posted by yclipse at 7:36 AM on October 31, 2021
posted by yclipse at 7:36 AM on October 31, 2021
This thread is closed to new comments.
posted by qxntpqbbbqxl at 11:56 AM on October 30, 2021 [1 favorite]