Legal Question in Real Estate Law in California
Tax liability or not
My sister wants to add her son's name to the title deed on her house (joint tenents) for purpose that when she and her husband die he can have the house. They don't want to use a will or a living trust. I say that if she does that it will not be an inheritance but rather be considered as a gift and is therefore taxable (gift tax or income tax). She does not think so because she says he will not be takeing possession of the house until after they are both gone.
2 Answers from Attorneys
Re: Tax liability or not
By putting his name on the deed, he becomes at least a one-third owner of the property [whether he occupies the house or not is irrelevant]. When both parents die, his one third does not take a stepped up basis. It is a gift but that offsets the amount of the estate exclusion from estate tax, which probably will not matter. In general, the vast majority of real property attorney are opposed to what your sister intends to do. There are few advantages and many disadvantages.
Re: Tax liability or not
Attorney Shers is correct, except that your sister can deed less-than 1/3rd of the property to her son, and the balance (if correctly titled and vest) will transfer upon their death, and get a stepped-up tax basis. Whatever they deed to him will be a gift, and to the degree gifts are taxable to the recipient, he will be liable for income taxes in the year it was gifted. Within the tax laws, there are exclusions for gifts under a certain amount, so they need to consult with their tax advisor to determine how much can be gifted, and how best to vest the property. They should also consult with an attorney regarding the proper vesting. This has the potential for severe consequences both now and later for the son, so its important that they seek professional advice and avoid the many traps that exist in situations like this.
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