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I want to buy a new house for my dad. I will pay all cash. No mortgage. Small $300,000 house. As a gift. We live in AR.

Ideally, I want this to be a surprise. I was thinking to buy a house in my name and only then bring him over, give the keys, then we’ll go to our county records and I’ll rewrite the deed in his name.

However, will this complicate my taxes? Will it be better to buy a house in his name directly? Then he’ll have to sign, and there will be no “surprise”, but is this even legal for me to make an offer to a house that I’ll pay for, but he will be the owner?

What is the most tax efficient way?

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    Consider talking to an estate attorney, there may be more tax efficient options (and potentially safer options for your father in terms of how it may affect their taxes)
    – littleadv
    Apr 18, 2023 at 16:08
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    Another option - would you be open to keeping ownership but letting him live there rent-free indefinitely ? That may have other implications, but it does make inheritance easier later. (much later)
    – Criggie
    Apr 19, 2023 at 3:20
  • A house is a huge deal, and has massive financial and lifestyle implications for your dad. You absolutely should not buy one for him without him even knowing about it ahead of time. Apr 20, 2023 at 20:59

5 Answers 5

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I wouldn't give him the house at all. I would simply tell your dad you bought the house for him to live in rent-free. Keep the house in your name. This sounds counterintuitive, but I have a really good reason

mhoran_psprep touches some on this

If they have to move out of the house, then their ability to get government aid for their nursing home expenses could be impacted.

There's a word you need to have in the back of your mind: Medicaid. You might be thinking "Wait, my Dad has Medicare. Medicaid is for poor people." It generally is, but there's a lesser known reason for Medicaid enrollment: he might need a full-time nursing home. I don't know how well off he is, but a full-time nursing home runs into eye-watering sums of money per month. We're talking as much as $10,000/mo. That's not pocket change, and if he lingers on that adds up VERY quickly.

I hope at this point you have a power-of-attorney that allows you to create trusts. Most stock power-of-attorney documents don't list that one. I would consult an attorney that specializes in family law if you need a re-draft. That power is about to become super important.

When you apply for Medicaid in this circumstance, you will have to draw him down to about $2000-3000 in current assets. You will then have to provide a mountain (I am not exaggerating) of documentation, including any bank statements, investments, assets, etc. These record requests extend back 5 years. When this process is done, Medicaid will penalize him (i.e. you) in months, based on how much disallowed transfer happened over the last 5 years (i.e. he gave you money, a vehicle, etc.). If he owned the house you want to give him at any point in that time frame, Medicaid will want to look at that, and they will penalize you if they think you sold it for less than market value. You will then be directed to fork over any income (like Social Security) to the nursing home and Medicaid will chip in the rest.

The key for your father at that point is drawing him down to the minimum. Arkansas has something called a Miller Income Trust.

If your income exceeds the limit, you may meet the income eligibility criteria by setting up an Irrevocable Income Trust (also known as a Miller Income Trust or MIT.) An Irrevocable Income Trust is established by signing a legal document and setting up a special bank account to fund the trust. This account must only be used for your income trust. All your countable income must be placed into the bank account each month and your trustee must only make payments (disbursements) from the account according to Medicaid policy and procedures as shown on the Long Term Care/Assisted Living Post-Eligibility Income Worksheet (DHS-712.) At the time of your death, funds remaining in the account are paid to the Arkansas Department of Human Services for reimbursement of Medicaid expenses paid on your behalf.

Most states have some variant of this. Basically, you shove all his assets above the minimum into that trust and then apply for Medicaid. That way, you avoid having an essentially broke family get penalized after having forced them to go broke first. The MIT does not count as an asset for the purposes of Medicaid. You can then use the trust on his behalf for his care above and beyond the nursing home. When he dies, the MIT will inform Medicaid and Medicaid will be reimbursed for its expenses. If the expenses exceed the amount the MIT has, they will simply pay out whatever they have. If there's any left over, they take a cut and send whatever is left to you.

This is a VERY expensive way to do this, especially if you sold a $300,000 house in the middle of all this.

Keeping the house in your name also has the benefit of not having to potentially probate it. If you have any siblings, and the will does not list the house as returning to you, this may lead to a costly legal battle where none of you get the house in the end (your lawyers will thank you for your business, however).

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  • The Miller trust sounds like a very useful tool. Are there requirements/limitations on how assets from the MIT are used while the Medicaid recipient is still alive? I would assume so, or otherwise it seems like the trustee could simply empty the trust just before death, stiffing Medicaid on its expenses that the trust would have reimbursed otherwise. Do you need to save documentation of any disbursements from the trust for the additional care of the Medicaid recipient?
    – Jason R
    Apr 20, 2023 at 2:56
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    @JasonR That's correct. You can only use these trusts for expenses related to the care of the person the trust is for. That list is reasonably broad, however. In most cases, you submit the expense to the trust and they pay for it directly.
    – Machavity
    Apr 20, 2023 at 18:13
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Besides the discussion of gift taxes which have been handled by other answers, there is an additional consideration.

Giving your parent a house could cause issues related to their retirement. If they are getting any government aid that is dependent on their income or net worth, the fact that they are a homeowner could cause that aid to decrease or they could become ineligible.

If they have to move out of the house, then their ability to get government aid for their nursing home expenses could be impacted.

You may need to not only look at it from your perspective, but from their financial perspective.

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    For this situation, who would you hire to take a look? I was thinking of a financial advisor, but it doesn't seem to 100% fit, or I just don't fully understand their full functions.
    – Nelson
    Apr 19, 2023 at 0:44
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    @Nelson financial advisor seems right, maybe one specialized in retirement and/or real eastate? My fist thought was a lawyer but I think that a correctly specialised financial advisor might be better
    – Hobbamok
    Apr 19, 2023 at 9:15
  • Some government assistance programs will exclude one's primary residence in net worth calculations. Now, if your dad owned a previous house (whether he keeps or sells it), then that would increase his net worth in most cases.
    – Earth
    Apr 19, 2023 at 18:20
  • Another option is to put the house in a trust. However, a financial planner would have better guidance with this.
    – Earth
    Apr 19, 2023 at 18:21
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The tax that you need to be concerned about is Federal gift tax (and possibly State gift tax) because the amount of the gift is more than $17K in one year. Gift tax is due from the donor (you) and not the donee (your father), and if the donor refuses to pay, it is possible that the IRS will go after the donee. Gift tax is computed on Form 709, which is not attached to Form 1040 but sent separately to a different IRS office than the one where you file your Form 1040, by June 30th of the year following if I remember correctly. Many people avoid paying gift tax by filing Form 709 but asking that the gift tax due be charged against their Combined Lifetime Gift and Estate Tax Exclusion ($12M+), and your CLG&ETE will reduced by $300K. If this reduction is of consequence to you (e.g. you expect your estate to be more than $12M), I am sure that there are many attorneys in AR who will gladly assist you in structuring the deal is the most tax-efficient way.

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Gifts more than $16K will require a Form 709.

You don't pay any taxes on the gift, though. It "just" reduces your $12.06M estate tax exclusion.

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  • And that estate tax exclusion remains even after the OP inherits the house back... Buying a house for their father to live in seems the best move.
    – Jon Custer
    Apr 18, 2023 at 13:33
  • Not paying any gift tax at present by charging it against the estate tax exclusion is an option, and not something that is automatic just by filing Form 709. The donor doesn't have to choose this option; the donor could just pay the gift tax instead. Apr 18, 2023 at 13:35
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    @DilipSarwate sure OP could pay the gift tax, but why would he do that? Maybe if he has more than $12M in assets, but if he really has more than $12M in assets, he should have a CPA and estate planning attorney instead of needing to talk to dogs on the internet.
    – RonJohn
    Apr 18, 2023 at 14:19
  • My comment was directed at your offhand comment "You don't pay any taxes on the gift". The OP has a choice as to whether to pay gift tax now or to reduce the lifetime exemption and while it makes most sense for most people to choose reducing the lifetime exemption, that is not the case for everybody as you yourself state in the your comment but not in your answer. [My own answer](money.stackexchange.com/a/156526/5760 )(posted a few seconds after yours appeared) does address this issue, and makes the same comment re attorneys who could help the OP structure the best method. Apr 19, 2023 at 19:43
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Consider using a trust.

Instead of transferring ownership to your parents, place the real estate in a trust. A gift-in trust (investopedia) is a good way to avoid gift taxes, with some caveats.

A gift to a Crummey trust allows the beneficiary to withdraw the gift assets for a limited time, which makes the gift considered to be a present interest and eligible for the gift tax exclusion.

You will need specialized help to set this up. Contact a law firm that has experience setting up these trusts.

Another alternative is the charitable remainder trust. In this irrevocable trust, instead of donating the real estate to your parents, you transfer it to a CRT, and set up the parameters to allow your parents to use the real estate until both pass away. Then the real estate is owned by the charity you selected when setting the trust.

With a CRT, you get tax benefits. These tax benefits may offset some of the losses incurred by donating he property. Again, consult with a specialist to see if a CRT is right for you.

Or maybe use a land trust. You can set the trust to hold the property while your parents are alive, then transfer it to a beneficiary, avoiding probate. If set correctly, there is no ownership transfer as far as the IRS and other tax agencies are concerned.

Everything here varies wildly between states. You need professional and experienced help to set one of these structures correctly.

In some states, you can even set an irrevocable perpetual "Dynasty" trust, where the assets become permanently owned by the trust but the profits and benefits from these assets are handed out to the beneficiaries. This can guarantee that the assets support your family for generations to come.

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