19 Sep Never Put your Kids Names on Anything!
Never Put your Kids Names on Anything! I bring this up because every once in a while someone comes up with the brilliant idea to put things in their kids names to avoid liability, probate, seizure by Medicaid or Medicare or hide it from a creditor. These are not acts of asset protection but rather desperation. Let’s take a look at a few of the problems this creates.
IRS Gift Tax
What happens when you put your house in your kid’s name(s)? As far as the IRS is concerned the value of the house at time of the “gift” is subject to IRS gift tax.
Every year, both you and your spouse can gift an amount not subject to a tax penalty. That amount changes each year. In 2019 that amount remained at $ 15,000.00 everything above the annual gift tax exclusion amount is subject to gift tax.
If there was a mortgage on the house the full value of the mortgage is a gift to you and your spouse and you owe tax on that as well.
5 Year Look Back Period
The second reason you should Never Put your Kids Names on Anything is the 5 year Look Back. Do you know what Medicare or Medicaid can do if they find out you put the house in the kid’s name(s) to avoid their clutches? There are two possibilities.
First, which I am not aware of actually happening, Medicare can go back five years and UNWIND the gift and take the house anyway.
Second, Medicaid can deny coverage for the remainder of the period. The fact is that almost everyone gets to the point of last resort and attempts to give away their assets to relatives in order to qualify for Medicaid. When a Medicaid applicant gives away property within five years of applying for coverage for long-term care it triggers the look back period. At that point Medicaid presumes that the gifts were made to qualify for Medicaid. This will trigger a period of ineligibility for Medicaid long-term care benefits on the theory that those assets could have been used to pay for the individual’s care.
REMEMBER: If you gift or transfer assets prior to this Five year look–back period, there is no penalization. The date of your Medicaid application is the date that the look–back period begins. In 49 states and D.C, the look back period is 60 months. In California, the look back period is 30 months
Don’t think they can find out? I cannot tell you the number of posts I have read on social media advocating or admitting to just such a deception. Once it is on social media, everyone knows.
Forfeiture of Basis
The third problem is forfeiture of basis. If your kid’s go to sell the house after you gift it to them the entire sale is subject to capital gains tax. Since it was a gift they have no acquisition cost or basis. The entire sale that’s right 100% is subject to Capital Gains tax.
Your kid(s) will pay capital gains tax to sell the house for you to move into a smaller home, condo or onto your final resting place. Now even more taxes are due.
Never Put your Kids Names on Anything
Learn to use trusts and Land Trusts for estate planning purposes. For all that is green in Ireland, talk to an estate planning attorney or your local real estate investors association about estate planning ideas.
Kids are like Yogurt
The fourth problem is that their issues become your problem. To quote asset protection attorney Lee Phillips, “Kids are like yogurt. You never know when one of them will go bad”.
If just one of your kids gets sued you could lose your home. Your residence ends up in the court records and now belongs to whoever wins the lawsuit against them. It doesn’t matter if it is a car accident, divorce or whatever. If your kid loses the case, the judgment says that you have a new landlord.
Loss of Homestead Exemption
The fifth and possibly most costly problem is loss of the sale homestead exemption for income tax purposes. When you sell your principal residence everyone is entitled to a $250,000 exemption on the sale price for income tax purposes. If you are married this doubles to a $500,000 exemption.
To get this exemption you must either be on title or a beneficiary of a properly set up trust or land trust agreement AND lived in the home for two of the last five years.
Example: you purchased the home for $375,000 and sell if five years later for $900,000. You would only pay land term capital gains tax on $25,000.00 at time of sale. Use the following equation to reveal the amount not subject to capital gains.
Sale Price – (Basis + Exemption amount) = Long Term Capital Gains
$900,000 – (Basis or purchase price of $375,000 plus $500,000 exemption = $875,000) = $25,000 Long Term Capital Gains
This is probably the most expensive reason you should Never Put your Kids Names on Anything!
Besides Medicare and Medicaid there are other reasons for individuals transferring title out of their name. The following are a set of factors that a court may consider Red Flags when they need to determine whether or not a defendant has engaged in a fraudulent conveyance
First, the transfer or conveyance of assets renders the debtor insolvent. It effectively stripped the debtor of the ability to satisfy his or her debts.
2. A debtor transfers assets yet retains possession or continues to enjoy the benefits of ownership derived from the assets. This is the case when the parents transfer the title of their residence into the name of one or more of their children. But the parents still live there. Even stock sales can be fraudulent when stocks change hands but it is still the debtor who receives the dividends from the stocks
3. Sale for less than full market value. Do you think the courts would look closely when an asset is sold for much less than its normal market value?
4. Sale between close relatives or friends.
5. To avoid loss during litigation. Was a lawsuit already filed when the transfer was made?
6. The debtor’s financial condition.
7. Cumulative effect of a number of transfers.
8. Chronology of events
9. Degree of secrecy
10. Deviation from normal behavior.
Red Flag Summary
If two or three of these top ten red flags of fraud are present it may be enough evidence to prove the intent to defraud in court. For each additional red flag a court will be more likely to rule in favor of a creditor in a fraudulent conveyance case. When a debtor-defendant loses in a fraudulent transfer case, the courts attempt to place the assets back within reach of creditors. However, the plaintiff-creditor is not typically entitled to any other punitive financial compensation from the court. The transferred assets simply revert to their previous status prior to the transfer, that is, they may now be used to satisfy a creditor’s claim.
Never put your kids name on anything! Always seek competent legal advice when planning your estate or making your asset protection strategy. Avoid the appearance of a Fraudulent Transfer. Never put your kid’s names on anything. Use Trusts and Land Trusts to own real and personal property.
If you are interested in true asset protection strategies, look for our upcoming workshop next spring.
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Good Luck and Good Investing.