Attorney Thomas B. Burton answers the following question: "How Can I Give Land to Daughter Without A Lot of Expense?"
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Welcome back, I am Attorney Thomas Burton and today we return to my popular Question and Answer Series where I answer real reader questions from across the State of Wisconsin.
Today's question is the following -
"How can I give land to my daughter without a lot of expense?
My husband and I would like to give our daughter our vacation property. It is five acres with a pole barn and small trailer on it. We just want to be able to transfer the deed to them. My husband's health is preventing us from using the property and we don't want to pay the property taxes on it anymore."
So this is a good question and one I see come up a lot with vacation homes, lake homes, cabins in the state of Wisconsin.
If you want to give your daughter the property, you can likely gift it to her using what we call a Quitclaim deed and then filing a gift tax return reflecting the value of the property gifted during life to your daughter. You will likely not owe any gift tax on this transaction unless you have made significant other previous lifetime gifts but you need to let the IRS know you're giving this asset during life and then they deduct that amount from the total amount you can leave to your daughter at death. That's assuming the value is over $15,000.
You can give $15,000 per year per person gift tax free without filing a gift tax return but most real estate is going to be over this limit, so then you would need to file the gift tax return. The total amount you can leave tax free at death is currently 11.7 million dollars per person. So what happens is let's say, this property you're giving to her is worth $200,000 dollars, you file that gift tax return and they deduct $200,000 from the 11.7 million total, leaving you with 11.5 million you can leave at death and that's in short what's known as the Unified Gift and Estate Tax System in the United States and it's designed to allow wealthy people from giving away all their assets during life to avoid the 40% federal estate tax at death.
So be aware that if you gift it to her during your life, she will likely take the property at your current basis, meaning whatever you paid for the property plus any improvements for capital gains tax. So if your daughter plans to just keep the property forever, this may not be as big a concern but if she would turn around and sell it, she would owe capital gains on that, the sale from your basis, she takes your inherited basis, if you gift it to her and then she would owe the difference between what she received it at, what she sells it for. So when you file that gift tax return, that would be a good way to reflect the basis, the value of the gift excuse me, that will be the value of the gift but your basis may be lower. So you would need to work with a CPA, accounting professional to figure out the basis and for your daughter later, if she turns around and sells it.
So, if it's a highly appreciated property, this is something to think about why many people choose to leave assets at death because currently, you can get new basis at your death if you leave it to your daughter that way. So in that case, you might want to look at if that's the case leaving it to her through your trust or if you want to go through probate court through your will.
The other thing is, you mentioned your husband's health and if you're thinking about doing this and that you may need Medicaid assistance to pay for long-term nursing home care, then you should be aware that although you can do this process, I just outlined, gifting it to your daughter via Quitclaim deed and filing the gift tax return, there is a five-year Medicaid look-back period for any transfers made for less than value. What this means is, essentially, a gift like this where you're giving it to your daughter and not receiving fair market value from a third party or from your daughter, that's going to be considered what Medicaid calls a divestment. So if you do that and then you need Medicaid in the next five years, they will penalize you by the amount of the divestment. So let's say again, the property's worth $200,000 and you give it to her today and then you need Medicaid, three years from now, they will look at that as a divestment of $200,000 and impose a penalty period on you, the person applying, calculated by the average cost of nursing home in the state of Wisconsin, which is currently between eight to nine thousand dollars per month and then they divide the amount of the gift, that $200,000, divided by that, that's how many months you're penalized, you have to wait to get Medicaid for gifting away assets. So that's a short explanation of the look back period but if the health concerns are such that you may need long-term nursing home care, then think about that five-year look-back period. I don't know your age and some of those other factors. If you have plenty of other assets to pay for nursing home care, then that's okay or maybe you have long-term nursing home care insurance that covers you for at least five years, that would get you through the look back period as well.
I noted here you say, you don't want to pay the property taxes on it anymore, so if that's the main reason, it may not be the health concerns but be aware of that Medicaid look back period and if you're looking to do this, I would work with an attorney to either do the Quitclaim deed method or if the Medicaid concerns are coming into play here, I would sit down with a qualified state planning and Medicaid planning attorney who could run those numbers I mentioned in more detail for you and see what would happen if you do this contemplated gift and don't get through the Medicaid look back period. How that penalty would affect you and whether there's some other method such as perhaps using a trust to transfer it to your daughter that might work better because remember, if you leave it at death, there's no, that doesn't start the Medicaid penalty period. It's a gift during life, giving an asset away during life that would be considered a divestment.
So I know that's a bit of a longer explanation but there is a way you can do it via Quitclaim deed under federal tax law file, the gift tax return but if Medicaid planning, long-term care concerns are coming into this picture, I would examine these details closely with a qualified attorney before proceeding.
Great question, thank you for asking and we'll see you next time.
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