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My mother-in-law wants to transfer the title of her house into my wife and sister-in-laws names. Does this cause any problems 'tax-wise' down the road? She will continue to make pay all taxes. She just wants to take the house out of her name.
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My mother-in-law wants to transfer the title of her house into my wife and sister-in-laws names. Does this cause any problems 'tax-wise' down the road? She will continue to make pay all taxes. She just wants to take the house out of her name.
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The first thing that came to my mind was in WA State seniors can qualify for a property tax exemption...but only if they own the house. If it was transferred to your wife and SI name she would loose the exemption, if she had it.
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My mother-in-law wants to transfer the title of her house into my wife and sister-in-laws names. Does this cause any problems 'tax-wise' down the road? She will continue to make pay all taxes. She just wants to take the house out of her name.

This can cause a problem if she is looking for medicaid assistance with affording long term care: http://www.nolo.com/legal-encyclopedia/how-can-i-safely-tran...

IP
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My mother-in-law wants to transfer the title of her house into my wife and sister-in-laws names. Does this cause any problems 'tax-wise' down the road? She will continue to make pay all taxes. She just wants to take the house out of her name.

There are a number of issues, taxes and otherwise:
1.) She probably will need to file a gift tax return
It doesn't mean that any taxes are immediately due
2.) As previously noted, it may cause problems with qualifying for Medicare
3.) If the house has significantly appreciated, as a gift the cost basis remains the same. If inherited, it will receive a stepped up basis.
4.) The house is now owned by the daughters, and any problems they have could endanger ownership of the house: divorce, death, lawsuits, and financial issues.
5.) The sisters maybe on good terms currently, but things happen.

Your MIL should consult an attorney for estate planning. Fear of estate taxes can trigger really stupid actions that can't be undone.
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My mother-in-law wants to transfer the title of her house into my wife and sister-in-laws names. Does this cause any problems 'tax-wise' down the road? She will continue to make pay all taxes. She just wants to take the house out of her name.

Because??????

Without knowing her motivation it's hard to judge exactly how dumb this idea is. The only thing we know for certain is that no one would be able to deduct the property taxes since you must both be liable for them (own the property) and pay them.

Phil
Rule Your Retirement Home Fool
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You might want to check to see if all her senior discount on her taxes would be affected if she transferred it to your wife and her sister, retaining a life estate. In Florida, my mother conveyed her home to me retaining a life estate, and her "homestead" exemption remained until her death. Upon her death, all I had to do was file her Death Certificate in the recorder's office and the property was mine, not going through Probate.

Donna
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2. It causes nothing with Medicare. It could be an issue if she is doing it in hopes that Medicaid would pay for a nursing home.

The biggest issue is DIY estate planning is usually based on something somebody heard somewhere and it's usually wrong.
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My mother-in-law wants to transfer the title of her house into my wife and sister-in-laws names. Does this cause any problems 'tax-wise' down the road?

Yes. It does. A big problem. At least it does for income taxes.

If your MIL holds the property until she passes away, her daughters will get a step up in basis when they inherit the house. They could then sell it and pay no income taxes.

However, by making a gift instead, her daughters will carry over your MIL's basis (which I am assuming is significantly less than the current value of the house). That means when they sell it, they will get a big income tax bill.

Then there's the legal issues. By putting the house in the daughters' names, any financial problems either daughter runs into become the mother's problem, too. Given a big enough problem, either daughter might find themselves on the wrong end of a judgement and losing their 1/2 ownership of the house. That new 1/2 owner can then force a sale of the house to get the dollars they really want. I'm guessing the MIL wants to keep living in the house. After the forced sale of the house, MIL won't be able to keep living there.

I'm sure there are other problems, too. I'm just spelling out the easy ones to spot. Qualifying for Medicaid is another issue that's already been mentioned.

--Peter
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Wouldn't MIL's continued payment of the property taxes also be an annual gift?

Eric Hines
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"Wouldn't MIL's continued payment of the property taxes also be an annual gift?"

OP did not specify the use of MIL's house, but the majority of single family houses are owner-occupied, in which case the payment is more of a rent payment.
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My MIL wants to do this for 2 main reasons:

1) To hopefully not lose her house if she goes into a nursing home for a lengthy amount of time
2) So my wife and SIL hopefully won't have to pay inheritence taxes at the time of her death.

She wants to do whatever she can to limit the amount of "her money" the government can get from her in either of these cases.

She is seeing an attorney later today about her options. However, my wife wanted me to pose these questions before she went and to also see how this would affect us in the long run!

Thanks for your posts and comments, they are very helpful!
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My MIL wants to do this for 2 main reasons:

1) To hopefully not lose her house if she goes into a nursing home for a lengthy amount of time


Makes sense to me. Much better for me to pay her expenses rather than her paying them. I have no idea what her medical and financial circumstances are, but there is a Medicaid look-back period. If she needed Medicaid, a/k/a welfare, assistance before then her daughters would have to fork over its value.

2) So my wife and SIL hopefully won't have to pay inheritence taxes at the time of her death.

Unless she lives in one of the few states that have an inheritance tax, if she has enough assets to worry about estate tax she should have long ago seen an estate planning lawyer. Since there are so few estates subject to estate tax nowadays, it's more likely that she's bought into all of the political BS about the "death tax."

She wants to do whatever she can to limit the amount of "her money" the government can get from her in either of these cases.

Well, at least she's going to see a lawyer, which is a start. From our "true story" files comes the saga of a friend of mine. In order to save money by not bothering with lawyers, wills and such, his parents just put him on the deed to the house for an $8 filing fee. Such a bargain. Fast forward to her widowhood and my friend's bankruptcy. He qualified for a liquidating bankruptcy, which would have meant she'd lose her home. So he went with a chapter 13 and 3 years of payments he wouldn't have had to make in a chapter 7.

Phil
Rule Your Retirement Home Fool
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My MIL wants to do this for 2 main reasons:

1) To hopefully not lose her house if she goes into a nursing home for a lengthy amount of time


She needs to be aware of the look back period.

2) So my wife and SIL hopefully won't have to pay inheritence taxes at the time of her death.

Exemption amount for 2013 is $5.25 million. If she is worried about item 1, then item 2 shouldn't be a problem.

Changing title doesn't eliminate risk. It changes the risk. The more people on the title, the more the risk something will happen. We have probably all seen at least one senior lose their home because of DIY attempts to "protect" their home or avoid inheritance taxes.
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2) So my wife and SIL hopefully won't have to pay inheritence taxes at the time of her death.

Exemption amount for 2013 is $5.25 million. If she is worried about item 1, then item 2 shouldn't be a problem.


And, of course, Item 2 ignores the fact that by gifting the house to them, they inherit her basis, and so will owe capital gains taxes when they sell vs. inheriting the house at the stepped-up basis, and if the entire estate is below that threshold, no taxes would be owed.

So it's possible that she is actually creating a tax liability where there was none before by doing this.

Glad she is going to see an attorney to help her make appropriate plans.
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1) To hopefully not lose her house if she goes into a nursing home for a lengthy amount of time

Not sure if this will impact you, but be aware that some states have filial responsibility acts on their laws, which basically states that the nursing home, hospital, etc can go after the kids if the parents can not pay their bills. The state I live in is very aggressive with these laws.

Of course while they will make you responsible for these bills, they also severely limit your ability to keep your parents from destroying themselves financially. We can be our own worst enemy as we age.

IP
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Wouldn't MIL's continued payment of the property taxes also be an annual gift?

I'd classify that problem as an ugly pimple on the ugly backside of a very ugly problem.

While it might be a gift, I could easily see the IRS attempting to classify it as rent. And that would make it taxable income to the daughters.

And seeing as it would likely be a rental without a profit motive, the only deductions allowed would be those allowed on schedule A: property tax and mortgage interest. So the income would be offset by the deduction, but inbetween you've increased AGI, creating an impact on anything affected by AGI (like medical and misc itemized deductions, taxation of Social Security benefits, IRA deductions to mention a few).

And then the daughter would need to itemize to get the deduction. So worst case, the additional property tax deduction is still not enough to allow the daughter to itemize, making the whole property-tax-as-rent payment taxable income.

Instead of avoiding taxes, all I see is tax increases in this "plan".

Hopefully someone involved here will wake up and smell the coffee.

--Peter
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Well, at least she's going to see a lawyer, which is a start.
And hopefully she is asking the lawyer for advice on how to minimize the taxes. Not just telling the lawyer "I need you to help me transfer this property."

FWIW, I would hope that one or both daughters go to the lawyer's office with her. And ask questions about the things brought up here... Not all lawyers know about estate planning (nor should all of them need to - and hopefully if they know it's estate planning they'll send you to someone who *does* know the topic)
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My MIL wants to do this for 2 main reasons:

1) To hopefully not lose her house if she goes into a nursing home for a lengthy amount of time


The proposed action cannot likely be undone - so be certain.

Each state had operational differences with regard to Medicad, but I believe all have at least a three year Look Back period. Assume your MIL's look back is three years. If in 2 years she need a nursing home, Medicare will cover up to 30 days if she comes there from a hospital. Medicaid will "see" she paid property taxes and owned property less than 3 years ago. They will require her to pay the nursing home costs up to the value of the house before she can get a dime of Medicaid funds - that would not be the cost of the house to your MIL, but the market value. Just where will those funds come from is something you might want to consider whether you or anybody else happens to have title to the house.
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I want to thank everyone for the responses. My MIL was talked out of this after seeing all the responses and talking to her attorney.
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