There is a common estate planning device that do-it-yourselfers use that could end up costing big time. Here’s how it works. Let’s say Grandma Agnes has a house that is free and clear. She’s getting up in age and doesn’t want her heirs to have to deal with court. Plus, she might be concerned she’s going to have to go into a nursing home and she knows that the state is going to take all of her assets before they start paying.
So, she takes the simple step and saves some money on a lawyer. She just uses a quit claim deed to change the name on the property. She signs it to her daughter because she knows she’ll make sure everybody else is taken care of.
The problem is that Grandma has just triggered a gift tax issue. Under current law (2014), you can gift $14,000 to an individual without having to pay gift tax. If you gift more than that, you will have to pay a gift tax of up to 40%. So, let’s say Grandma has a house worth $200,000. She could now have a tax due of over $70,000.
She could also get some professional assistance, in this case a CPA who is experienced with estate and gift tax laws. She could apply the excess against her lifetime gift amount of $5.34 million. But unless she gets the right form filed, she’s going to be looking at a lot of tax.
That’s the law anywhere in the US. But it’s especially a problem in California right now. The IRS is reviewing title transfers in California, based on the theory that houses cost more there and so they are more likely to run into a big gift tax problem.
It might seem simple to just sign over an asset, but there can be a lot of problems if you don’t have a strategy first. Plus, if your plan is to reduce assets so you can qualify for state or federal funding, you could run into the charge of a fraudulent conveyance. That means the government has the right to unwind the whole thing. Strategy first!
We received a question related to this at USTaxAid.com.
Q: If I receive a real property in California as a gift (deed transferred in my name with no financial consideration), as a gift receiver do I owe any taxes?
What documentation I need to keep to prove this transaction as a gift to me and keep the basis of donor for this property.”
Gift tax is due from the giver. But, if the transaction is set up properly, with the right tax filings, there won’t be any tax due.
If you’ve got a tax question, there are a couple of ways you can get an answer.
You can go to the front page of USTaxAid.com and submit a question to be answered in a blog or you can go to ustaxaid.com/consultation to set up a private consultation or you can give Richard a call at 888-592-4769 to find out more about how we can help you safely and legally pay less tax.