Q: My parents – for estate planning purposes – have transferred the title of their main residence and summer house to me. I am wondering if I could be sued, should anyone be hurt on their (my) property.

Do you have any recommendation as to how to handle these two properties?

A: I wish parents would stop transferring title outright to their kids, for estate planning or other purposes. It can cause several other serious issues.

First, there are the tax issues. If you give someone anything worth more than $12,000 in a single year, you have to file a gift tax return with the IRS. Any gift amount over the limit reduces the amount you can later pass down tax-free in your lifetime. I don’t know the value is of your parent’s two properties, but I’m guessing it’s in excess of $12,000, $24,000 (if each of your parents gave you their share), or $48,000 (if both of your parents gave $12,000 value each to you and your wife).

The second tax issue is that when title is transferred, you receive the properties with the current cost basis. In other words, if the properties cost $25,000 to purchase 40 years ago but are now worth $1 million each, you get them with the $25,000 cost basis. If you turn around and sell them, you’ll pay capital gains tax at 15 percent plus state tax. If you inherit these properties, you’d get them at their $1 million cost basis. If you turned around and sold them, you probably wouldn’t owe a dime in taxes.

What could your parents have done? They could have set up one of many types of estate planning mechanisms, including trusts, to have the properties transfer to you upon their deaths or even during their lifetime.

One final note: If either of these properties still has a mortgage associated with it, and your parents are paying off the mortgage but have transferred title to the properties to you, they may have violated a provision in the mortgage that states that the lender has a right to “call” the loan due and cause your parents to immediately pay off the remaining balance on the loan due to the transfer.

As the transfer is done, let’s focus on your question: Liability. Since you now own these properties, you are liable should something happen to a visitor or worker on site. You should purchase property insurance and that insurance should have sufficient liability coverage to protect you in case there is an accident at either property. In addition, you can have an umbrella policy to cover you for an additional amount on these properties and any other you might own.

As far as managing the properties, if you’re going to rent them out someday, you can look into creating a limited liability company (LLC) in which to hold them. The income from the LLC could flow directly to you. An LLC may also provide you with some additional legal protection in case someone sues you.

Please find a knowledgeable real estate attorney and tax advisor who can help create a solid real estate investment strategy for you to follow.

June 5, 2008.