Thursday, April 4, 2013

Should I add my children to the title to my home or cabin?

This is a big decision.  You should proceed very cautiously.    If you do this, you have a made a gift and you cannot unilaterally rescind the gift.  There may also be adverse tax consequences of trying to rescind the gift.  Other mechanisms may accomplish what you want with less risk or consequence to yourself.  For instance, if you just want to avoid probate, a Transfer on Death Deed  (“TODD”)accomplishes what you want without risk to yourself or creating any of the problems listed below.
                Practical Considerations
If you add your children to title, you no longer own your home or cabin alone.  Instead, your children own it with you.    If you sell the home or cabin, you no longer get 100% of the proceeds. 
The decision to sell or not sell the property is not only yours anymore.  If the children do not want to sell, you may have to bring an action to force a division of the property or a sale (This is called a “Partition Action”).  Unless you have reserved an interest as a life tenant, the children may be able to bring a Partition Action against you to force a sale.  In addition, your children’s creditors may take their interest away from them and then be able to force a sale of the property.  You may trust your children to co-operate with you but do you trust their creditors?
If you have a mortgage on the property and file a deed transferring title to your children without the lender’s permission, you will have violated the “due on sale” clause that is in most residential mortgages.  This means that the lender can decide to declare the full mortgage payable immediately and, if you do not pay them off, start foreclosure.
You no longer would be able to get a mortgage without having the children sign the mortgage.  If any of the children have a spouse, the spouse will have to sign the mortgage because of technical real estate rules.  (Even if the spouse is not in title by reason of the marriage the spouse may have some rights in any land owned by the child and so the mortgage company will require the spouse to sign the mortgage in order to make sure that the spouse cannot avoid the mortgage.)
Each person who owns an interest has a right to sell or transfer his/her share of the property.  Although it would be rare that a third party buyer would have an interest in purchasing less that the whole title, other relatives, spouses or a developer might.    These new owners could then bring a Partition Action to force a sale.
If you make your child a co-owner as a tenant in common or a joint tenant, then the child owns an “undivided” fractional interest in the property.    For instance, if it is just you and your child in title, each of you owns an undivided one-half interest. 
If you and your child own property as joint tenants and one of you dies, the whole property passes to the surviving joint tenant.  However,  if you add the child and do not specify that the child’s interest is as joint tenant, the child is considered a tenant in common.  If the child is a tenant in common and the child dies, the child’s interest is transferred to whomever the child leaves it to in the child’s will or to the child’s heirs at law if the child dies without a will.  That could be the child’s spouse.  A probate will also be required.
                Medical Assistance Consequences
If you have to go into a nursing home or need in-home care, putting your children in title may adversely affect your ability to get the government to pay for such care.  If you cannot afford to pay for the nursing home or your in-home care, the government will pay for it under Medical Assistance (“Medicaid”).  If you simply add your children to title, you have made a transfer for less than fair market value under the Medicaid rules.  One of the questions asked when you apply for Medicaid is whether there have been transfers for less than fair market value within the last 60 full month (five years ) period.  This 60 month period is called the “look back period.”   If you have made a transfer for less than fair market value within the look back period, you will not be eligible for Medicaid for a period of time determined by the value of what was given away.  (The calculation of the ineligibility period is the value of what was transferred divided by the average cost of semi-private nursing home care in the state (“SAPSNF) (currently around $5,000).) During any period of ineligibility you will have to pay for your own care.  The only way you can avoid this is to not apply for Medicaid for five years from the date of the gift or get the value of what you gave away returned to you by everyone to whom you gave assets.   All gifts made during the look back period count in this calculation.  So, if you give your children your $250,000 home and sometime next year you give one of the children $20,000 to help with an unexpected financial problem, Medicaid will use $270,000 in calculating your overlapping ineligibility periods and all that money has to be returned to you.
                Tax Consequences
There also are gift tax, estate tax and income tax consequences of adding your children to title.  Any gift of a remainder interest or a gift of more than $14,000 (for 2013) in any year to a person means that you have to file a gift tax return.  There is no gift tax currently in Minnesota and the federal exemption amount for gifts if $5,000,000 but you still must file a gift tax return.
If you do not retain a life estate or joint tenancy interest in your home or cabin, the interest that you gave away has a carryover tax basis to the children.  This means that they get the basis that you had in the interest you gave away.  If, instead you held the home or cabin until your death, the children get a basis based on the fair market value as of the date of your death.  Historically, getting the stepped up basis has been much more advantageous.  If your children then sell the house or cabin the difference between the sale price and the basis is capital gain and they have to pay income tax on the capital gain.  Between federal and state taxes, that tax could be more than 20% of the gain. 
If you do retain a life estate or joint tenancy interest in your home or cabin, you have not accomplished any avoidance of estate taxes.  Both termination of a life estate  or joint tenant interest result in inclusion of the property in the decedent’s estate for estate taxes.
If your home is sold during your lifetime, you get an income tax exclusion because it is the sale of a primary residence.  However, unless your children live in the home for at least two years after they became owners and before sale, they do not get this income tax exclusion.
Finally, in Minnesota property owned by a person that was gifted or inherited to that person is normally non marital property in the division of property between spouses in a divorce.  However, if your child used marital assets or income to pay for upkeep, at least a portion of the value will be marital.  Also, if the value of what would otherwise be a non marital asset is necessary for the support of the spouse, the court can require inclusion of non- marital property in the division of assets.  So, if one of your children gets a divorce after you put them in title, the home or cabin may be considered in the property settlement and the home or cabin may possibly be awarded to the spouse

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