How Can I Transfer Fractional Shares of My Real Estate to My Children
If I make a gift of $15,000 shares of property I own to each of my children, do I also have to put them on the property title as co-owners of the property? It’s my understanding that I cannot define how much of the property is theirs – that once names are on the title, everyone owns the same. If I don’t put them on the title, how do they prove that they are co-owners if I don’t have to report the gift?
Yes, almost by definition, you have to give your children ownership of their new shares of the property. You can do this on the deed by giving them fractional shares as tenants in common. But this gets laborious, especially if you plan to keep giving them additional shares each year. Fortunately, there are devices for making this easier.
In my state of Massachusetts, we have a device called a nominee realty trust. You would transfer ownership of the property to the trust. The beneficiaries of the trust would then be listed on a separate schedule of beneficiaries that would not be recorded at the registry of deeds. You would then be able to continue to transfer small percentage interests to your children each year by updating the schedule of beneficiaries without recording anything new at the registry. You could serve as trustee of the trust. Under the terms of the trust, you would have to act as directed by the beneficiaries, which is why it’s called a “nominee” trust—the trustee is the nominee for holding title of the true owners listed on the schedule of beneficiaries.
If a nominee realty trust mechanism is not available in your state, limited liability partnership (LLP) or corporation (LLC) may be more common. These are somewhat more complicated than nominee realty trusts and may require registration with your secretary of state as well as the registry of deeds, but they work similarly. The general partner or partners manage the property for the benefit of the limited partners. You would be able to transfer limited partner shares valued at $16,000 or less to your children each year. If you served as general partner, you would maintain control over the property.
All of this begs the question of why you would want to transfer shares of your property in the first place. In the past, this was often done to avoid estate taxation, but with the federal estate tax threshold now at $12.06 million (as of 2022), very few estates are subject to it today. A number of states still have their own estate taxes at much lower thresholds. But transferring ownership shares of real estate to reduce these state taxes could result in larger capital gains taxes when and if your children sell property, such costs exceeding the estate tax savings. I strongly recommend that you consult with a tax specialist before taking any action. He or she can also advise you on the preferred mechanism for transferring fractional shares in your state, if, after the consultation, you conclude that it makes sense to move ahead with your plan.
Are State Estate Taxes Deductible on the Beneficiaries’ Income Tax Returns?
Can a Massachusetts Resident Avoid Estate Taxes by Making Gifts to Get Below the $1 Million Threshold?
How do Taxable Gifts Work in Massachusetts?
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