Gifting Real Estate

[sthomson]

My Grandma was told by her lawyer that she must leave her house to her only child: my mother. My mother has been on Social Security Income due to chronic fatigue syndrome for the past 30 years. My Grandma's lawyer states that once my mom inherits the property the state of California will take it because my mom has been receiving SSI. My question is this: how could I buy the property for $1 or have her gift it to me so that the state of CA doesn't take it? NOTE: The house's $86,000 mortgage is paid off and the current value of the home is $165,000.

[Diane Kennedy]

Interesting question, but there are a few parts that I'd like to clarify.

Grandma can leave the property to anyone she wants. It doesn't have to go to your mom or even a family member, for that matter. She could give it to a complete stranger or her dog (stranger things have happened). My guess is there is some reason why the attorney is insisting it goes to your mom, but to be honest, I'm not sure what that could be.

If your mom gets some govt assistance like SSI, she will have to turn over the assets. So, leaving the property to her isn't a good idea.

Can you buy the property directly from your Grandma? Yes. If you buy for less than fair market value, then the difference is considered a gift and subject to gift tax restrictions.

One strategy we've used is to create a sale to a related party (like with you and your Grandma) at the fair market value of the property with a self-cancelling note. So, let's say the property has a fair market value of $200,000. She sells the property to you at $200,000. There is a fair market value amount of interest associated with the note (say 4%). She can gift you $13,000 this year. The interest, which she'll forgive would be $8,000 and the principal would be $5,000. So, the loan amount is now $195,000. Eventually, you have been gifted the house.

Or, she could simply name you as beneficiary of the house.

Or there could be some kind of combination of the two.

What does your Grandma want to do?

[sthomson]

I think I remember reading something about the self-canceling note strategy. It seems like the best option. What she would like to do is get a reverse mortgage so that she can pay off her 4 credit cards which have about $15,000 in balances so she can pocket more each month.
A crazy side story: she inherited stocks in Sears in the 50s when her father was CEO. The shares split and she received stock in Morgan Stanley and Allstate as well. In early 2008 she had about 30,000 shares between the 3 companies at a value of $2.7 Million and was collecting $10,000 a quarter in dividends. Then in Oct 2008 with the crash her stock broker called her and told her that they were selling all of her stock to pay back money she borrowed on margin in the 70s. She claims to not remember signing anything to borrow about $50,000. They sold the shares and she got NOTHING. It cost her all of her shares and her dividend income.
So I was trying to figure that if I bought the property for what she was looking to get then she would achieve her goal without incurring new mortgage payments and the mess of figuring it all out when she passed. She is 84 years old.

[Diane Kennedy]

On the self-cancelling note... it doesn't have anything to do with a reverse mortgage.

Basically she sells you the house with seller financing and then over time forgives part of the debt - up to the gift tax exclusion amount.

Any good estate attorney will know what this is. Probably best bet is for you and her to go to an attorney together so you can make sure you're all on the same page.

[raxitrei]

That is a great style for paying some credit cards in no time. That is a gifting real estate business with a sure profit. Maybe some lawyer might explain this to us with exact information on how it works.