Here are things to consider, and how to proceed correctly in the rare circumstances where transfer is warranted.
1. Obtain eligibility for Medicaid
Many parents believe that transferring property to their children will help them qualify for long-term medical insurance benefits under the Medicaid program . However, in most cases this qualification is not available. If the applicant applies for long-term health insurance benefits from Medicaid within five years after transferring the property to the child, the Medicaid Administration will consider that the gift was made to qualify for the Medicaid program.
This will result in the applicant being ineligible for a period of time. The theory is that the property could have been used to pay for personal medical insurance. In fact, Dean said, the house may not have been included in the asset valuation originally. For example, if the applicant transfers the property to a spouse or child who has lived in the house and provided necessary care for at least two years, the five-year rule will not apply.
2. Preservation of property
If the value of the parents’ property is within the tax exemption range allowed by the Internal Revenue Service or the state tax authority, for the purpose of wealth preservation or It is not advisable to transfer property to avoid taxes. Where federal gift tax applies, the tax rate may be as high as 40%, and state gift taxes may also apply. If the house is part of a normal estate, the tax liability is likely to be much lower. Parents who want to pay less tax can sell the property and share the proceeds with their children.
For married couples, the first $500,000 (approximately RMB 3.11 million) of income is exempt from capital gains tax, while single taxpayers are exempt from paying capital gains tax on the first $250,000 (approximately RMB 3.11 million). 1.56 million) is exempt from capital gains tax.
The closing of a house also eliminates the option of a reverse mortgage. When making a reverse mortgage, the homeowner borrows money against the property rights of the home. According to the agreement, the borrower can continue to live in the house, but when the home is sold, the borrower moves out, or dies, the loan (and accumulated interest) ) must be paid in one lump sum.
3. Large estates and trust assets
If the transfer can reduce your parents’ property to the point where you don’t have to pay inheritance tax, that might be a good idea. That's a way to keep most of the assets for your children, even if they later decide to sell them and then pay taxes on them. If the parents want to transfer the property but continue to live in the house, additional legal steps are recommended. One option is to establish a "life estate," an arrangement in which parents pay their children "fair market" rent.
If rent is not paid, the parent is considered to have a "retained interest" in the home. Salvo said that in this case, the Internal Revenue Service will treat the transfer as never occurring and determine that the property should be included in the scope of estate tax collection. It is recommended to seek legal help when entering into such arrangements.
Another option is to apply for a qualified-personal-residence trust, which allows parents to transfer a home to their children in a trust - this can significantly reduce estate taxes and Gift tax costs pass. It also allows parents to live in the home for a predetermined period of time.
Under this arrangement, if the parents live in the house, the gift tax levied on the transfer can be significantly reduced, and the taxable value of the gifted property will depend on the length of time the parents plan to live in the property. It can be as low as 25% of the current fair market value of the home. All increases in value after the transfer of property are also tax-free for the trustee and children.
Parents who own a large home can also give or sell their home to a "defective grantor trust". The taxable portion of the home's value is frozen, and any appreciation in the home's value during the parents' lifetime is not associated with their property. Any income earned by the trust is taxable to the grantor, but by deeding or selling the property to the trust, the grantor immediately reduces the value of his or her property, and any increase in the property's value It will be tax-free to the trust beneficiaries.