Should I Transfer My House to my Child?
Pennsylvania Inheritance Tax:
The 4.5% tax will not be paid if the property is transferred more than one year before death.
Capital Gains Income Tax- BEWARE
Basis- The basis of the property transferred before death is the same as the grantor. This tax must be paid by the owner when the property is sold. The current tax rate is a minimum of 15% to a maximum of 20% plus additional tax for high income sellers.
If the same property is inherited by deed or trust, the basis of the property is “stepped-up” to the value as of the date of death. Therefore, if the property has been owned for a long time and has a low initial purchase price, it is normally better to devise the property to the child by will and not deed during lifetime unless the child will reside at the home. Upon sale of the home, the resident child will not have to pay any capital gains income tax unless the gain on the sale exceeds $250,000.00.
If the child will not reside at the property as the child’s primary residence, it is not recommended that the property be transferred prior to death. The capital gains income tax of at least 15% will normally be much greater than the 4.5% Pennsylvania Inheritance tax.
If the property is transferred to a child or the child is added to the deed, the property becomes subject to the child’s creditors including spouse of the child if there is an action for divorce.
Unless the house is transferred to a child who is disabled or living at the home and providing substantial living assistance to the parent, the grantor-parent will be ineligible for medical assistance if the property is transferred within 5 years of the Application for Medicaid.
Estate Recovery Medicaid Planning
The particular circumstances of the parents and children must be fully reviewed and considered before deeding the property rather than providing for an inheritance under a standard Will.
Right to occupy after transfer
If the parent will continue to occupy the property after a deed transfer, there should be written agreement to clarify who will be paying for the expenses of the property including maintenance, and if the property can be sold if the parent no longer lives at the home.
Real Estate Tax and Homestead Tax Deductions
The parent will lose these benefits if not the owner of home.
David R. Bane, Attorney, Member of the PA and NJ Bar
Federal Estate Tax
On January 1, 2013, Congress passed the Taxpayer Relief Act of 2012. The reason it was pushed into 2013 was so Congress could say that the vote was to lower taxes which had increased on the same date. Pursuant to the Act, as of January 1, 2015, there is no federal estate tax unless the value of an individual estate exceeds $5,430,000.00. For married taxpayers who file a Federal Estate Tax Return, the surviving spouse can claim the unused credit of the pre-deceased spouse so that most families can now bequeath up to $10,860,000 to their surviving heirs with no Federal Estate Tax. The tax rate for those estates exceeding these thresholds is now 40%. There is no tax to surviving citizen spouses regardless of the size of the estate.
Pennsylvania Inheritance Tax
Spouse – no tax
Children – 4.5% of entire estate
Siblings – 12% of entire estate
All others- 15% of entire estate
New Jersey Inheritance Tax
Class A Beneficiaries: spouse, children, grandchildren
There is no tax for first $675,000.00
All other beneficiaries pay a tax rate of 11% to 16% based on the size of the Estate
New Jersey Estate Tax
If the assets of the Estate exceed $675,000.00
The rate of tax is up to 16% based on the size of the Estate
There is no tax to a surviving citizen spouse
REVOCABLE TRUSTS AND WILLS
David R. Bane, Member of the PA and NJ Bar
Revocable Living Trusts v. Wills – Tax Consequences
Assets held by a Revocable Living Trust are subject to the same death taxes as property passing under a Will. In addition, the transfer of real estate to a revocable living trust can create Medicaid ineligibility.
Probate Expenses v. Revocable Living Trusts
The actual probate court costs for probating a Will in Pennsylvania is $350.00 for the first $300,000.00 of the probate estate with additional fees of $150.00 for each $100,000.00 over $300,000.00.
The probate estate does not include assets that are payable on death directly to beneficiaries such as retirement accounts and life insurance payable to a named beneficiary.
The expenses of a Revocable Living Trust including the costs of deeding assets to the trust normally exceed the costs of probate. Unless the intent is to keep assets in trust after the death of both spouses, it is normally more cost effective for the Executor of the Estate to deed directly to the heirs under authority of the Will.