Q: My parents gave my sister and me their house four years ago for $1. I have found out that when my mother and father die and we sell the house, we will have to pay capital gains tax on the sale.

The inheritance tax in our state is around 5 percent. Wouldn’t we be better to retitle the house back in my parents name and pay the inheritance tax upon their death? They intend to live in the house until death.

A: As I’ve often written in my column, it’s a lot better, in some cases, to pay inheritance tax than capital gains tax. Your parents, if they died today, could pass down $3.5 million each. (If they die in 2010, they can pass down an unlimited amount of wealth tax-free.) So, if they die this year, and their home is worth less than $3.5 million, you wouldn’t pay any federal taxes at all on the sale. It’s only if your parents are above the limit where inheritance taxes can be quite high and make your parents regret they didn’t make better plans of their assets while they were alive.

Before you transfer the property back to your parents, here’s the other side of the coin: Any assets your parents own would have to be used before they could qualify for Medicaid. There is a five-year lookback period for Medicaid. The transfer in your family took place four years ago, but still could be unwound if a judge deemed that your parents were actively trying to shield their assets from Medicaid.

Also, before you do anything, you need to review the value of the house, the value of other assets your parents have and review their whole estate plan. In some states it isn’t cheap to transfer property back and forth and in some states real estate taxes change as properties are transferred. You have many issues to consider before you decide to transfer the property back to you parents.

For an explanation of your legal options, please seek counsel from an estate or elder care attorney.

Jan. 19, 2009.