MIL moving title to her 4 kids - risks?

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MIL moving title to her 4 kids - risks?

Post by kombat »

My Mother in law is considering moving the title of her home into her 4 kids' names (one of whom is my wife), in the hopes that it will simplify estate planning for her in the future. She's only 65 and is planning on fully retiring later this year (she's a part-time teacher). I'm wondering what the risks would be of her doing so.

Some wrinkles: She was born in the US but moved to Canada many years ago (at least 4 decades). I'm pretty sure she's a Canadian citizen, but she hasn't been paying any US taxes in many, many years (She's of course been paying full Canadian taxes). She was potentially caught up in that issue a couple of years ago where the IRS announced it was considering going after back taxes of expatriates, but as far as I know, nothing ever came of it.

The residence in question is her primary residence, in which she's lived for 30 years. The mortgage was paid off in full decades ago. There is no HELOC.

The risks I'm aware of are:
  • If any of the 4 kids get into financial difficulty, their share of the title would be considered an asset, and vulnerable to creditors.
  • When it comes time to sell the home, there could be disagreements between the siblings about what constitutes a "fair" price, and those opinions could be influenced by the individual's need for the money
  • It could be logistically cumbersome to get all 4 siblings together to deal with the paperwork upon eventual sale of the property (they're currently spread out across 3 different cities across Alberta and Ontario, and the property is in Nova Scotia).
As it is, all 4 siblings are grown and on their own, and doing very well for themselves. I don't expect any of them to ever be in any financial difficulty. All 4 siblings are currently on excellent terms with each other.

Is this a low-risk move? Are there any risks I'm not thinking of? Does it actually buy her anything? Is there a better alternative?
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Re: MIL moving title to her 4 kids - risks?

Post by like_to_retire »

While your MIL is the owner of the home and it's her primary residence, then it appreciates tax free, and that could potentially be a lot of appreciation over her retirement years.

When she passes and the new owners wish to sell the home, I believe they would be subject to capital gains on the value appreciation from the time it's title is transferred until sale.

Doesn't seem like a good plan.
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Re: MIL moving title to her 4 kids - risks?

Post by Just a Guy »

Technically, at any time after the transfer, the kids could decide collectively that they want to sell the house. If they do, your MIL would have no say, she'd also have no claim to any of the money from the sale of the house.

No matter what their current financial situation, money has a weird way of corrupting people. I know one family of 4 millionaires who squabbled about the parent's 100k house when they died. Even though it was evenly divided, two felt that was still unfair as they were lesser millionaires than the other two and thus felt they deserved more...

I've also seen family members bankrupt their parents when given power of attorney while they are still alive, basically legally stealing all the estate for themselves, leaving the still surviving parent with no way to support themselves. When the remaining family discovered this, and tried to sue, they found out there was nothing illegal.

Be careful with your estates, money does weird things to people.

Personally, I wouldn't worry about capital gains, the market is more likely to tank in the future. Plus, who cares about paying gains on money you didn't earn, to the kids it's free money...

If she does go ahead, you have to file the proper paperwork with CRA however, so they know what the present market value is so that the future gain/loss can be properly calculated.
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Re: MIL moving title to her 4 kids - risks?

Post by Peculiar_Investor »

I'm not seeing how transferring ownership of a principle residence simplifies estate planning. As like_to_retire states, the sale of principle residence is exempt from inclusion in income taxes. See CRA's Principal residence and other real estate for more details.

Most literature and discussions that I've read about transferring ownership of real estate for estate planning purposes are related to cottage's in Muskoka that are second properties and therefore a sale (or deemed disposition) is subject to inclusion in your tax return and subject to capital gains. There has been lots written about estate planning options in that scenario, with no definitive approach, there are pros/cons to each.
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Re: MIL moving title to her 4 kids - risks?

Post by SQRT »

This seems like a particularly bad plan to me for the reasons already mentioned. More tax, potential for disagreements, no simplification that I can see, in fact the opposite. Tell her not to do it.
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Re: MIL moving title to her 4 kids - risks?

Post by ockham »

SQRT wrote:This seems like a particularly bad plan to me for the reasons already mentioned. More tax, potential for disagreements, no simplification that I can see, in fact the opposite. Tell her not to do it.
Agree completely. A really really bad idea. While we're at it, people generally have an exaggerated, unfounded view of the complexities of probate. In sum, the MIL's plan is a non-solution to an imaginary problem.

The OP doesn't mention his MIL's health. Assuming it's fair to good, the most likely future is one in which she lives in the house 5-10 years and then simplifies by moving to a condo, apartment, etc. She doesn't need four kids on title to do that.

What MIL needs is a good will and a POA. Done.
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Re: MIL moving title to her 4 kids - risks?

Post by Just a Guy »

It does simplify probate. While there are no inheritance taxes (yet) in Canada, the cost to probate a will is based upon all the estate's assets. For most people in Canada, the principle residence makes up the majority of the estate, so removing it significantly lowers your probate fees.

Of course, if you have power of attourney, or the person is still competent just before death, you could transfer it out much closer to the end.

Probate is a little more complicated with the house, but it also depends on the province. I've probated wills in multiple provinces, in some provinces, the benefits would be more than others.
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Re: MIL moving title to her 4 kids - risks?

Post by planB »

Just a Guy wrote:...No matter what their current financial situation, money has a weird way of corrupting people...
+1
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Re: MIL moving title to her 4 kids - risks?

Post by DenisD »

If one of the kids divorces, would the share in the house complicate things?
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Re: MIL moving title to her 4 kids - risks?

Post by kombat »

You guys brought up a lot of great points I hadn't considered, thanks very much. My MIL is currently in great health, but I hadn't considered the capital gains or divorce possibilities. I'll bring it up with my wife and make sure my MIL has all the information she needs to make an informed decision.
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Re: MIL moving title to her 4 kids - risks?

Post by AltaRed »

Not only that, but if one of the 4 also get into creditor problems, the house could be tangled up in that scenario. There are so many downsides for potentially a single upside that I woudn't touch that with a 10 foot pole.
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Re: MIL moving title to her 4 kids - risks?

Post by Thanak »

Multiple sibling seems like a disaster waiting to happen.

My parents wanted to pass their rental build to my sister and I to lower their revenu to avoid pension clawback. I took a mortgage and bought my parents house and they split the after tax cash between my sister and I so essentially I bought my sis part. I also gave her to option of matching my offer so she could buy me out if she felt I was cheating her. Ownership entenglement avoided.

It's her primary residence so there doesn't seem to be any upside.
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Re: MIL moving title to her 4 kids - risks?

Post by kcowan »

This is a case where the probate fees would be money well-spent. We had the same issue with MIL and were glad to pay the fees.
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Re: MIL moving title to her 4 kids - risks?

Post by SQRT »

kcowan wrote:This is a case where the probate fees would be money well-spent. We had the same issue with MIL and were glad to pay the fees.
Exactly and the probate fees are only a percent or two? Actually nil in Alberta. Small price to pay.
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Re: MIL moving title to her 4 kids - risks?

Post by ockham »

kcowan wrote:This is a case where the probate fees would be money well-spent. We had the same issue with MIL and were glad to pay the fees.
Agree. The OP says the property is in Nova Scotia. This link says probate fees in NS top out at 1.645%.
http://www.taxtips.ca/willsandestates/p ... ees/ns.htm

And remember, MIL is in good health. Probate is likely years away, and the place is likely sold long before then in any event.

If, instead, you do a property transfer now, (i) you will pay a land transfer tax now (surely NS has one) of a percent or two, (ii) you'll pay a lawyer now to do the transfer, and (iii) you SHOULD pay a lawyer now to do an agreement that will try to address in some rational way the problems that this arrangement courts, some of which have been identified up thread.

Bad idea all around.
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Re: MIL moving title to her 4 kids - risks?

Post by AltaRed »

ockham wrote:(iii) you SHOULD pay a lawyer now to do an agreement that will try to address in some rational way the problems that this arrangement courts, some of which have been identified up thread.

Bad idea all around.
And just in case the OP hasn't got enough pushback, or cannot kill that bad idea, that agreement drawn up by the lawyer should consider amongst the other things mentioned so far: 1) tenants in common ownership rather than joint title, 2) allocation of responsibility for expenses and upkeep and remedies for a rogue owner not paying his/her fair share, 3) voting procedure on major upgrades and disposition, etc. Just agreeing on how to sell the place amongst 4 owners, listing price and what price to accept could trigger a Hatfield McCoy feud.
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Re: MIL moving title to her 4 kids - risks?

Post by OhGreatGuru »

Given that the MIL and house are in Nova Scotia, and all the children are in Ontario and Alberta, they are probably going to have to pay someone in Nova Scotia to settle the estate anyway. A paid professional will take care of filing for probate, and selling the house. If the house is part of the estate the proceeds will cover the necessary fees. The MIL would be best to arrange for estate services as part of her estate planning & will.

Before she goes any further with her idea she should talk to a lawyer or the trust division of one of the banks about how her estate is going to be settled. She can make a lawyer or trust company sole executors; or she can make them joint with one or more of her children, so that someone in the family has to "sign off" on everything; or she can make the children executors, with the expectation that they will pay for "estate services" from the lawyer or trust company to do most of the grunt work.
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Re: MIL moving title to her 4 kids - risks?

Post by kombat »

She'll be talking with a lawyer for sure - I'm just concerned about how knowledgeable any local lawyer would be with regard to her specific situation (expatriate American living and paying taxes in Canada for decades). I asked my wife last night what her mother hopes to gain by this move, and her concern is capital gains and inheritance tax claims from the IRS upon her eventual demise. She wants to pass the property to her kin at full value and avoid owing taxes to a tax-hungry IRS, should they ever decide to start actively pursuing citizens living abroad, even if it's been decades since they've lived in/filed taxes in the US.
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Re: MIL moving title to her 4 kids - risks?

Post by brucecohen »

kombat wrote:I asked my wife last night what her mother hopes to gain by this move, and her concern is capital gains and inheritance tax claims from the IRS upon her eventual demise.
US estate tax would be an issue only if MIL's estate is worth more than US$5 million. The US principal residence tax rules are complex but IIRC there's no tax due on the first US$250,000 of gain. MIL should consult a cross-border tax advisor. Googling on halifax,cross-border tax planning will turn up links to several in Halifax.

BTW, did MIL ever work in the US and pay Social Security FICA tax? If so, did she tell CPP? Integration of US and Canadian credits might increase her CPP and/or generate a Social Security entitlement.
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Re: MIL moving title to her 4 kids - risks?

Post by kcowan »

I think her concern is that she qualifies as a "US Person" and needs to file with the IRS.
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Re: MIL moving title to her 4 kids - risks?

Post by kumquat »

I get to re-phrase an old axiom: "Don't let the probate tail wag the asset dog".

I don't think it's wise and wouldn't do it with my house. YMMV.
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Re: MIL moving title to her 4 kids - risks?

Post by Rysto »

Practically speaking, is there any way that the IRS can get their hands on the money anyway? They can claim whatever they like, but do they have the ability to force 4 Canadian citizens to actually pay anything?
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Re: MIL moving title to her 4 kids - risks?

Post by ockham »

Rysto wrote:Practically speaking, is there any way that the IRS can get their hands on the money anyway? They can claim whatever they like, but do they have the ability to force 4 Canadian citizens to actually pay anything?
The general principles are (1) that an executor may be held personally liable to creditors to the extent that the executor pays out estate assets to beneficiaries in preference to creditors, and (2) that creditors may follow estate assets into the hands of beneficiaries. An executor's liability ought not to exceed the value of the estate. A beneficiary's liability ought not to exceed the value of estate assets received.

In theory, then, the 4 Canadian citizens might be liable to the extent that they are in receipt of assets due the IRS.

There may a lot of work ahead of the creditor to establish said liability, but those are the background principles.
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Re: MIL moving title to her 4 kids - risks?

Post by brucecohen »

Rysto wrote:Practically speaking, is there any way that the IRS can get their hands on the money anyway? They can claim whatever they like, but do they have the ability to force 4 Canadian citizens to actually pay anything?
Canada and the US have a mutual assistance agreement under which CRA can act as agent for the IRS in enforcing a US tax claim. IIRC, the IRS would have to overcome a number of procedural roadblocks and the agreement is obviously meant for big dollar cases but, yes, the IRS can enforce tax collection in Canada. That said, unless the MIL in this case is extraordinarily wealthy I doubt that her estate will owe much, if any, US tax. If she is extraordinarily wealthy, she can afford professional advice and should be seeking it.
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Re: MIL moving title to her 4 kids - risks?

Post by Just a Guy »

It's the executor's job to insure that all liabilities are paid off (up to the value of the estate) before any distributions are made. Creditors always come first.
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