I recently received another call from a lady that wanted to “add her son’s name” to the deed, thinking that this would provide some benefit. Therefore, I had to pull out my comments from an old post, review and repost them. The advice still stands: A method that is NOT a solution to this scenario (below) is to “Add [someone’s name] to the title”. This solves nothing and brings in additional problems. We use other procedures and documents.
Often, in a San Antonio practice, we have people call in and ask to transfer a property from a parent to the child, children, or grandchildren. Of course there are other variations within the family, perhaps from an aunt to a niece, or from an adult child to a parent that needs a small home for retirement.
These could be sales from one family member to another, but are often made as “gifts”. There are a few considerations that we commonly make. This attorney has a few practices and preferences, but of course, the final decisions are left up to the client, so long as honesty is involved and nobody is misinformed as to the duties, responsibilities, and results.
The word “clients” brings up the first question. Who is the client?, the donor, the donee, or even a spouse of one of those parties. My preference would be to have the donor as the client, especially in a “gift” situation. If the parties contact me together, I can have joint representation, so long as there is a written agreement disclosing any conflicts. However, sometimes we represent solely the grantee, but whatever representation we use, it must be made clear to all parties.
Transfers of property are generally done by “Special” Warranty Deed, which assures that the grantor has or warrants title is good, so long as he/she had it, but does not ensure that the title had no defects when it was received by the grantor. This would be appropriate for a “gift” situation, not a purchase, which would require a “General” Warranty Deed.
We would have the same considerations as to condition of the property. In a gift, I would expect that the donee would take the property “as is”, but the matter should be discussed and documented.
Thirdly, title reports and insurance are usually not called for in the case of a gift, but that point should be reviewed as well.
I don’t like the situation where property in which an elderly person lives is transferred to a younger family member (“to avoid probate”), and then the younger person sells the property or otherwise evicts grandma. I don’t think we’ve had that situation on transfers in our office, but that is why I like to consider that the grantor retain a “life estate”. This allows the grantor to reside in the property so long as they live, and even move out and rent it out for additional income. Then, at the time that they pass away, the life estate terminates, and full title is good in the grantor.
In analyzing the possibility of death, the parties should also review the possibilities and eventualities in the life of the grantee, and whether that makes any difference in the gift. Transferring property off, and then forgetting about the possibilities of the other person, much less predicting and controlling them, is just fine with me. However, one should understand the contingencies of death of the grantee, or bankruptcy, marriage, and/or divorce, and should either make provisions, or be resigned to not regret the transfer. These deeds are irreversible and irrevocable.
Now, does the “gift” create a tax issue? Under the Internal Revenue Code, a gift (unless exempt) creates a tax liability for the DONOR, the one who gives the property. Now, settle down, because under current law, amounts up to about Five Million Dollars are not taxable. Even previous laws held this exemption up at a Million Dollars or so. Therefore, most of these homes that are being given between families do not reach the exemption amount. Below that, there is an “exclusion” amount, and gifts below that amount do not require any tax return or consideration at all. The exclusion amount is $14,000 per year, can be doubled by spouses, and can be used once annually for each donee. In other words, transferring a property worth $52000 or less could be handled by each spouse giving $14000 of the value to two donees.
Another way to use the $14000 exclusion is to a.) give a percentage of the property to the donee every year (like 20% of a $65000 property every year), or b.) give the annual exclusion for this year, with donee signing an owner carried mortgage for the difference, and then donating or forgiving a reduction in the balance every year, that is equal to the $14000 exclusion.
This does not mean that amounts over $14000 are taxable. They are covered by the donor’s lifetime exemption (up to $5+ mil, remember), but legally require a gift tax return filing, Form 706.
Revising this post for 2017: For 2017, the estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. That means an individual can leave $5.49 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield just shy of $11 million ($10.98 million) from federal estate and gift taxes. The annual gift exclusion remains at $14,000 for 2017. per Forbes
Now, ad valorem taxes are a different consideration and the effects need to be contemplated as well. “Ad Valorem” taxes are the local real property taxes assessed by the County, the City, and/or the school district, as well as various other entities. A property owned by an elderly person may have tax reductions and protections that would not continue when transferred to a younger person. Also, if the new “owner” is not a resident of the property, they will not be able to declare it a “homestead” and apply for a tax reduction given to those types of properties.
Lastly, donors should consider Medicaid issues, as to whether a later need for Medicaid services will be denied because of the disposition of the property, but that is a large, complicated matter meant for another column.