ELDER LAW TIPS FOR REAL ESTATE ATTORNEYS By Lois G. Andrews It is important for real estate attorneys to keep some elder law issues in mind. If a client asks you to prepare a deed transferring his house to his children (or worse, if the client requests that you transfer his parent’s house to himself), alarms should go off in your head. This is a quick summary of some issues that should be considered before the transfer. 1. Who is your client? This is an important question if you are initially contacted by the child (or other proposed transferee). Most elder law attorneys prefer to represent the parent (proposed transferor). However, if you have a pre-existing relationship with the child, it is a good idea to make sure that the parent is independently represented. 2. Federal Gift Tax. Both federal and Connecticut gift tax returns should be filed by the parent. If there is to be an outright transfer, the parent will be entitled to annual exclusions (currently $12,000 per donee). If the gift is not a “present interest” no annual exclusion can be claimed. For example, if the parent reserves a life estate the gift is of a future interest and there will be no exclusion. Any value in excess of annual exclusions will be a “taxable gift”. Under federal law, taxable gifts with a cumulative value of less than $1,000,000 will reduce the amount the parent can transfer at death and there will be no gift tax payable. For example, the current federal exemption for property passing at death is $2,000,000, consequently if there is a taxable gift of $150,000, the parent will be able to pass only $1,850,000 free of tax at his death rather than the full amount he could otherwise pass without paying tax. If the parent is married, but the gifted asset is in only one name, the couple can “split” the gift. This allows each spouse to claim annual exclusions. In order to take advantage of gift splitting, the couple must file gift tax returns, even if there is no taxable gift once the exclusions are claimed. 3. Connecticut Gift Tax. Connecticut also has a gift tax. It includes the same rules as to annual exclusions, and (as of 2005) the same concept of reducing the amount that can pass free of tax at death. The amount that can pass free of gift and/or estate tax in Connecticut is $2.000.000. The federal & state returns and any taxes are due on April 15 in the year following the year the gift was made. Although they are due the same day as income tax returns, they are separate returns. 4. Capital Gains Tax. If an asset is held until the parent’s death and is then inherited by the child, the asset gets a stepped-up basis. In other words, the basis of the asset is equal to the date-of-death market value. However, if the asset is gifted prior to death, the child gets the parent’s basis. For example, if a house was purchased for $10,000 but is worth $210,000, the $210,000 is reported on the gift tax return, but the child takes the basis of $200,000. If the child then sells the house, he will have a capital gain of $100,000, which will result in tax (to the federal and state governments combined) of approximately $40,000. If the house were retained until death and then sold, there would be no capital gains tax. Furthermore, if the estate of the parent is worth less than 2,000,000, there usually will be no estate taxes. Capital gains tax also is an issue if the house is sold while the parent is still alive. If the house were in the parent’s name, there usually is no tax because the parent has a $250,000 exclusion from capital gains on his home, if he has lived there and owned it for two years. However, if the home has been transferred to the child, the child usually will not be entitled to the exclusion, since it is not his home. 5. Medicaid. Parents often want to transfer the home because they are worried about nursing home costs. However, if the parents are married, the transfer can make matters worse. This is because the house is an exempt asset as long as either of the spouses is living there, but the transfer of the asset is a disqualifying transfer that could prevent the parent from receiving help from the State that he might otherwise be entitled to. If the parent is not married, the transfer may be a good plan. However, under current rules if the transfer is within five years of the date of application for Medicaid, the parent would be assessed a penalty period of disqualification. Effective February 8, 2006, the penalty period will not even begin to run until the parent has applied for and has been denied Medicaid due to the transfer. The length of the penalty is calculated by dividing value of the asset transferred by the current average monthly cost of nursing home care. The average cost in Connecticut currently is $7,905/month, so if a house worth $240,000 were transferred, the penalty period would last approximately 20 months. However, the penalty period will not even begin to run until the parent is otherwise eligible for benefits. This means that after an applicant has spent all of his assets on nursing home care he would still be ineligible for assistance if the transfer were made within 5 years of the application. 6. Rights of Creditors. If an asset is transferred to a child it becomes subject to a child’s creditors and also is subject to a division of assets in connection with a child’s divorce. 7. Loss of Control. It is important that the parent understand that a transfer is really a transfer. After the transfer the child can decide whether the house should be sold, and the parent has no say in the matter. 8. Inability to Utilize a Reverse Annuity Mortgage. Our elder citizens have the ability to increase their cash flow by taking out a reverse annuity mortgage. Under that arrangement, a bank will typically pay the owner a monthly amount for a term of years or for the life of the owner. The mortgage does not come due until the owner dies or moves out of the house at which point the mortgage comes due. This can be a valuable tool for a person who needs to increase his income, but the balance due builds rapidly and the client needs to be aware there likely will be little or no equity to pass on to his heirs. If the house is transferred to a child, this option is lost, unless the parent retains a Life Estate in the property. Return to Top                 Return to Index         Copyright © 2003 - 2006 by Andrews & Young, P.C. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include the above copyright notice. The information you obtain at this site is not, nor intended to be legal advice. You should consult an attorney for individual advice regarding your own situation.