Legal Question in Real Estate Law in California

As to gift tax, I don't regularly practice in this area and the law tends to change with each administration or each Congress, but I think every person (donor) gets an annual exclusion of $13,000 per donee and a $1 million lifetime exclusion for all gifts in excess of the annual per donee limit. Gifts to tax-exempt charities are also exempt. Anything else (in excess of these exemptions) is taxed at a very high rate....I think 45% this year.

The tax you don't mention is the capital-gains tax. It is due on the profit made by whomever sells the house. Let's set up a scenario for an example: Suppose sister acquired her small home in 1955 for $20,000, and that it is worth $350,000 today (and perhaps was worth $450,000 in 2006, but that's not part of the analysis). If she were to sell it today, she would make a profit of $350,000 - $20,000, or $330,000. This profit is called a "capital gain." Certain adjustments for long-term improvements, etc. could be added to the $20,000 "basis," but let's keep it simple. Capital gains are taxed at 15%, so there is potentially a tax of $330,000 x 0.15 or $49,500 due. (I hasten to add that if the home were her principal residence for at least two of the past five years, the first $250,000 of her $330,000 gain would probably be exempt from the tax!).

The same would be true if sister gave the home to your son right now, and he turned around and sold it.......he would have a $330,000 gain and, not having lived there 2-of-5, would not qualify for any exemption. He would owe $49,500 in capital gains tax. And watch out -- that 15% capital-gains tax rate is likely to go up!

Now, however, here's the tax-law wrinkle that induces so many people to pass their appreciated property to their heirs by means of a living trust. If sister put her home in a trust with your son as the beneficiary, and God forbid, she were to pass away, your son would inherit the home with a so-called "stepped-up basis" - not $20,000, but $350,000! So, if he sold the home immediately after inheriting it, his taxable gain would be zero, and he would pay no capital gains tax at all.

Living trusts have the additional advantages of avoiding probate with respect to property that has been placed into the trust, and also sister retains effective ownership and control of the property as long as she lives, since she is the trustee and, in any event, the trust is revocable. If placing son in immediate possession is a goal, maybe sister could give him a long-term lease at a very reasonable rental (to cover her expenses such as taxes and insurance) while at the same time retaining ownership through the trust we're discussing.

I don't do trusts, so this is pure advice and not advertising.

Mr. Whipple gives you excellent advice. In addition, almost every attorney I know warns agalnst every transferring ownership of your home to a child, adult or not, because of all the problems they have seen in the past, including children forcing theilr elderly parents out of their own former home. There does not seem to be any advantage except avoidance of fees for creating a trust, but that might be even less than the county and city tranfer taxes and recording fees.