Creative Financing

By
Real Estate Agent with Blue Sky Real Estate

Under current tax law, an individual can gift up to $13,000 each year to any individual with no taxable consequences to anyone. If you and your spouse gift to your child and his or her spouse, that gift can total $52,000-a sizeable down payment.

Couple this notion with one of the options below for creative financing:

Life Estate:
An estate whose duration is limited to the life of an individual (usually the party holding the life estate), and a legal arrangement whereby the "life tenant" during his or her life retains use (the rights to rents and profits), possession of the property and costs of maintaining the property. The life tenant cannot sell or waste the property without the consent of the "remaindermen".
1. The life tenant has the legal right to remain in her house for as long as she lives. Whereas, if she transferred her house outright, the new owner could legally sell the property the next day forcing the previous owner to vacate the premises.
2. The property immediately passes to the remaindermen without the necessity of a probate proceeding.
3. A life estate is useful for purposes of Medicaid eligibility and protection from Medicaid recovery by the state.
4. Downside- Pursuant IRC Section 2702 the gift tax value is the full value of the property, without any discount.

Qualified Personal Residence Trust (QPRT):
A QPRT places a residence in a trust either for the benefit of one's spouse and children or for a charity. This type of trust was created and passed by the US Congress in 1990, when concerns arose about inheritors of a house having to sell gifted property because they couldn't pay the taxes when ownership was transferred to them. A qualified personal residence trust can apply to a primary or secondary residence and can significantly decrease taxes at the time that the residence is inherited.

Since the gift is not transferred immediately its value is not equal to the value of the residence at the time the QPRT is created. Rather the value of the gift is based on the value of the future right to own the residence at the end of the specified term of years. This may make the gift value as much as 25-50% lower than the actual retail price of the house at the time of the transfer.

Gift to your chldren, live in your home, pay less taxes.  There are some creative options out there!

Comments (3)

Phil Stevenson, CRMP
PS Mortgage Lending 305-791-4874 or 888-845-6630 - Miami, FL
"Mortgage Nerd" in Miami, Florida and Texas

Another downside to life estates is the Life Tenant can be subject to any liens and judgments that the remaindermen has can be tied to that property.  So now its also the Life Tenant;s responsibility.  I have this with a client right now. 

We use the LE to take someone off title, and then put them back on under the LE as the REM to allow the Life Tenant to get the Reverse Mortgage.  The QPRT may be a better option, just not as inexpensive as the LE.  I like your ideas! 

Jun 09, 2010 07:09 AM
Anonymous
Heather Marrone

Thanks for the feedback

Jun 09, 2010 08:12 AM
#2
Anonymous
Collette Felix

My husbands mother  did a life estate in ky. My mother in law is running out of money. The house will be in his name 5 years in jan of 2012. The siblings want to put her in the nusrsing home in November 2011. We went to see an attorney and he said if we could pay for Nov. Dec. and Jan. Then in Feb. the house would be in my husbands name for 60 months. We are having trouble finding a bank that will loan the money against the life estate to keep her for those few months. My mother in law wanted my husband to have the house because he worked on the farm for 12 years with no pay plus a second job. Do u have any advice abouth getting a loan? He is so close to the 60 months, I just want to be able to advise him correctly. Thank u so much. Collette

Oct 26, 2011 08:53 AM
#3