Tips

Newsday
03/30/01

Q
My wife and I own a mortgage-free home in Hicksville. We are both 70 and retired. We have four children who we would like to turn our house over to now. How can we accomplish this? Are there any things we should consider?

A
There are three areas to consider: capital gains, estate taxes and Medicaid.

This year, individuals can [each] transfer up to $675,000 to heirs without paying any estate tax, said Jeffrey Fleischman, an associate in the trusts and estates group in the Mineola law firm Meltzer, Lippe, Goldstein & Schlissel. If your home is worth less than $675,000 or $1,350,000 for a couple, you could pass along this asset tax-free.

The downside for your kids is that the home's basis, or cost, for tax purposes is what you paid, Fleischman said. Since you have lived here a long time, the basis is probably low.

Your kids can get around the low basis, however, by having one of them receive the entire gift and live in the home for two or more years as his principle residence before selling it, Fleischman said.

At that point, up to $500,000 of any profits could be kept if the child is married and $250,000 if single. The proceeds could then be divided tax-free among the siblings, although this must be carefully orchestrated to avoid gift taxes.

You also could sell the home outright to your children, not using any of your estate tax credit, Fleischman said. But in both a sale and outright gift, your kids own the home. They could kick you out and sell it if they wanted.

If you leave the house in your will, you still own it and your kids inherit it a its value at the time of your death Fleischman said.

Another concern, however, is Medicaid, should you need financial assistance with a nursing home. When you transfer a house, you become ineligible for Medicaid for a period of time based on the county where the home is located and its value, Fleischman said. For example, in Nassau County, for every $7,840 in property you transfer, you are ineligible for one month of Medicaid.

One option is to make a gift of your home while retaining a life estate, Fleischman said. You can live in the house as long as you want and your kids receive the home upon your death at the stepped -up basis or value. There is still a Medicaid penalty period.

The strategies above only scratch the surface of options and drawbacks. Fleischman advised meeting with an attorney who specializes in either elder law or trusts and estates before doing anything.

Q
My wife and I recently applied for a mortgage. The mortgage broker told us the bankruptcy she filed before our marriage would not be a problem because it was over seven years ago and she had no delinquencies on her credit report. When the mortgage broker took our application so different lenders, we were declined by every one because my wife had another bankruptcy over 20 years ago. Should that have been held against us?

A
Neither bankruptcy was probably the cause of your rejection, said Bonni Nachamie, treasurer of the New York Association of Mortgage Brokers, a trade group, and an attorney whose practice focuses on real estate and bank regulatory work. For example, you can get an FHA (Federal Housing Administration) loan a year after bankruptcy has been discharged. There is probably something else in you credit history causing the rejections, Nachamie said. There may be a federal tax judgment or an unpaid student loan, both of which can't be discharged in a bankruptcy and remain on your credit until paid. When you are denied a loan, federal law requires that you receive a letter of explanation, Nachamie said. Get a copy of your credit report - which you can obtain free after a denial - work to correct the problem. It could be just a reporting mistake which a letter of explanation can resolve. If the reason is an unpaid judgment, pay it off, Nachamie said. Once you correct the problem, you should get your loan.

Q
My house is set up with my domestic partner as tenants in common. We also have a will and a living trust that names each of us the beneficiary of the other's share of the house. Does this protect us so that if one dies, the other gets the whole house?

A
When a home is owned as tenants in common, a partner's share doesn't automatically go to the other upon death, said Robert Kaplan, a real estate attorney with offices in Forest Hills and Garden City. It goes to the heir named in the person's will. Since you each have wills naming the other as a beneficiary, you should be protected, he said.