Another question this time about legal title

[JG EA]

Do you think that a hus/wife that bought a second home, their son lives there. They put their son's name on the title, and plan to have the son buy the home someday. Would they need to file a gift tax return automatically?

If you think so, is putting someone's name on a title alway a gift tax issue? Or does it follow the actual circumstances?
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Never mind. I did a little more research and decided it depends on the type of deed, intent, etc. I am going to pass off to their attorney.

[Koss]

Legal Title

Referring the issue to an attorney isn't a bad idea. The type of deed, as well as issues that are specific in each state, certainly have an impact.

But you should be aware that the answer to your question may vary somewhat depending on the perspective from which it is answered. An attorney who specializes in real estate, particularly one who operates a title company or closing service, may answer the question based on the real property laws of the state, without adequately taking into account some of the peculiarities of federal tax law.

There was a significant debate on this issue a couple of years ago. The issue comes down to this:

Suppose, for the sake of argument, that a single parent adds an adult son to the deed of his home in a manner that provides full joint ownership, i.e., an undivided 50% interest, with no restrictions.

Under state law, this means, among other things, that:

(i) if the parent later wishes to sell the property, the son must agree, and must sign the new deed;

(ii) the son could bring a suit to partition the property, forcing the parent to buy back the son's 50% interest at fair market value, or sell the property and give the son half the proceeds, and

(iii) the son's ownership interest is vulnerable to various types of attachment proceedings and liens, and if the son were to declare bankruptcy, his share of the house would be considered an asset within the bankruptcy proceeding.

However, under federal tax law, the transfer of ownership interest in the house may be considered an incomplete gift, particularly if the son does not actually live there, and does not contribute financially to the maintenance of the house.

In other words, if the son never exercises any of his ownership rights, and does not participate in a meaningful way in the performance of any obligations associated with ownership (such as payment of real estate taxes), federal tax law, particularly when it comes to gift tax and estate tax, recognizes that adding the son's name to the deed is effectively a form of estate planning, or a mechanism that is an alternative to the will-and-probate or trust processes.

Thus, from an estate tax perspective, the transfer of ownership may not take effect until the parent dies.

So, yes, the type of deed is extremely important, but you also want to make sure that any lawyer that looks at this is examining the issue from the perspective of federal taxation, and not just giving a textbook answer based on real property laws.

[JG EA]

I somehow missed your answer until now. Thank you very much for your reply and help. I will do what you say and have the client run this all by his attorney. I had mentioned some things to him but was waiting until after tax season to tackle.