How To Give Property to Children Before Death
You don't have to wait until you pass away to give your wealth to your family. In fact, in the case of large estates, it is frequently in your best interests to be generous with your children before you die. Otherwise, a large portion of your money will go to the IRS instead of your children.
Gift Tax Exemption and Outright Gifts
Under current IRS law, you can lawfully give away $13,000 annually without any tax consequences to your children. If your spouse is still alive, you can give a combined gift of $26,000. As you can imagine, this provides for a loophole large enough for some very creative ways to give property to your children.
The funds can be any cash assets, value in real property, or stocks and bonds. Any $26,000 from your portfolio can be transferred.
Sale and Debt Forgiveness
One of the more creative methods to dispose of real property is by "selling" the property to your children using a legal note. The note is drafted as though you are the mortgagor and the deed is changed into your children's names. Then, every year on January 1 (or any other appropriate calender year date), the debt is forgiven by $26,000 and the note is reduced. This continues until the property is completely transferred into your children's ownership.
Additional Giving Exceptions
If you still need to remove more funds from your estate, the IRS provides further gift tax exceptions for educational and medical expenses. According to IRS law, any direct payment for medical or educational expenses can be unlimited gifting amounts, totaling no more than $1 million over a lifetime. In other words, if your daughter is attending an expensive college and you would like to pay for it, you can cover all expenses that go directly to the college - gift tax free. This rule also applies to graduate education such as medical school or law school. Also, if a child is ill and has a large amount of medical expenses, you can step in and pay the hospital and doctor's bills for your child. Remember that the money must be paid directly to the medical institution in order to be gift tax free.
Consult an Attorney
Annual gift tax exclusion is a complex area of the IRS code. In order to avoid creating excessive tax bills for your children, giving should be done under the guidance of an attorney to ensure that the benefits for you and your children are maximized.