San Antonio Express-News MySA.com Copyright 2012, Paul Premack
February 13, 2012
Estate Deed is better option for transfer of house
Last week I addressed the legal issues raised by “R.B”, who said
that his mother was asking if she should transfer title to her house into
the name of R.B. (her son) and his wife. He liked the idea of avoiding
probate, but wanted to know if there were any negatives to owning his
mother’s house while she was still living.
There are a wide
variety of negatives. They include: a) possible violation of the terms of
her mortgage, b) possible federal gift tax complications, c) possible
increases in capital gain taxes, d) the great likelihood of a large
increase in local property taxes, d) mom’s possible disqualification from
receiving Medicaid benefits, and e) ownership complications between R.B.
and his wife as gift recipients.
Due to those complicating
factors, receiving a house via gift deed may be the wrong approach. But
there is a different legal strategy available to R.B. and his mother which
eliminates the complications. A specialized life estate deed arrangement
can be designed and written by your certified elder law attorney which can
address the negatives and turn them to your advantage.
will sign a deed conveying the property to R.B. and his wife, while
retaining life estate for herself. Then, so long as mother is still alive,
the house is still legally treated as her homestead. However, at the
moment of mother’s death her interest expires and R.B and his wife become
full owners of the property. The transfer happens without the need for
probate. It is important to include special terms in the deed that allow
mother to change her mind at any time she desires. Even if she does not
use the power to reverse the transaction, the mere power has positive
The complications of an outright gift are
eliminated using this special type of reserved life estate. First, the
terms of the mortgage will not be violated as there is no ownership change
during mother’s lifetime. The security interest she has granted to the
mortgage company is not violated. At the moment of her death, the property
is transferred, but that would also happen through some legal process like
probate of her Will, and does not violate the mortgage.
there is no gift tax consequence. Since mother has retained authority to
withdraw R.B.’s remainder interest so long as she lives, there is no value
to R.B.’s interest until mother’s right to withdraw has expired at the
moment of her death. Thus, there is no lifetime gift that would be subject
to the gift tax.
Third, since R.B. and his wife do not actually
own the house until the moment of mother’s death, they are awarded a free
step-up in basis under the tax code. This eliminates the chance that they
will be exposed to higher capital gain taxes due to receiving the house as
a gift, if they decide to sell the house instead of living there.
Fourth, the local tax assessor must legally continue to treat the property
as mother’s homestead, and must continue to grant to mother her 65+
exemption, her homestead exemption and her school tax freeze. Mother still
owns the property until the moment of her death. After that, yes, the
property taxes will increase; but they will stay at the lower rate until
mother dies instead of jumping up right away.
Fifth, since mother
has retained the power to reverse the transaction, in the eyes of Medicaid
there has been no gift and no disqualification from benefits results. The
key to this outcome is that no value is transferred until the moment of
mother’s death. The house remains her homestead and is an exempt asset
under the Medicaid rules. The bonus is that this type of deed currently
protects the homestead against claims under the Medicaid Estate Recovery
Finally, if R.B. and his wife receive the house as a
gift, they each receive a one-half interest as their separate property.
This is the only challenge that is not cured by using a reversible life
estate. Instead, after mother dies, R.B and his wife need to sign a
document that converts their separate property interests into community
property. Once done, they will gain a future step-up in basis tax benefit
(to be used when one of them dies) that they would lack if it remained
Disclaimer: This column answers a specific
legal question asked by an individual in Texas. The answer may or may
not match your individual situation. Be careful not to treat this
column as specific legal advice, as it may not meet your individual
needs. It may give you a solid basis for discussion with your own
You should consult with your personal
attorney before you take any action on this or any legal issue.
Also, please be aware that laws change, so this column is valid only
as of the date it was published. This communication does not create an
attorney-client relationship between the author and the reader.
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Paul Premack is Certified as an Elder Law
Attorney ( CELA ) by the National Elder Law Foundation as accredited by
the Texas Board of Legal Specialization and tthe ABA. He is licensed to pracice law in Texas.
Benjamin Premack holds a JD and a Masters Degree in International
Affairs, and is licensed to practice law in Washington State and in