It seems natural to want to protect your home in the event that you are unable to maintain it. A logical thought is to give it to your kids. You need to take care when transferring your house to children. Let us say the parent is 90 and has a will bequeathing a home to a child, a son. The house was purchased 20 years ago for $300,000 and is now worth about $400,000. The child stays there occasionally to help care for the parent, but he doesn’t live there. The parents’ estate is otherwise worth less than $1 million. Nj.com’s recent article entitled “What are the pros and cons of transferring a home’s title?” explains that there are two primary reasons why parents want to transfer their home to their children.
First, they think they will be able to protect the house, in the event the parent needs to move to a nursing home. Second, they want to avoid probate.
Because many states now have a simple probate process for smaller estates, probate avoidance alone isn’t a worthwhile rationale to transfer the house to a child.
The transfer of the house to a child who doesn’t live there will be subject to the look-back rule for Medicaid, which in most states is now five years. As a result, if a parent transfers the house to the child within five years of applying for Medicaid, the transfer will trigger a penalty which will begin when the Medicaid application is submitted. The length of the penalty period depends on the value of the house. Therefore, if the parent might require nursing home care in the next five years, the parent should have enough other assets to cover the penalty period or wait five years before applying for Medicaid.
In addition, the transfer of the house may also cause a significant capital gains tax liability to the child when the house is sold. That’s because the child will receive the house with the carryover basis of the parent. However, if the child inherits the house, the child will get a step-up in basis—the basis will be the value of the house at the date of the parent’s death.
If the parent transferring the house retains a life estate—the right to live in the house until he or she passes away—the property will get a step-up in basis to the value of the house at the date of death. In the event that the house is sold while the parent is still alive, the value of the life estate interest will be excluded from income tax but the value of the child’s remainder interest in the house may be subject to capital gain taxes.
Last, if the house is transferred to a child who has financial troubles, the child’s creditors may be able to force the child to sell the house to pay his debts. Take care when transferring your house to children. Work with an estate planning attorney to ensure you have considered all the factors before you make a change in home ownership.
If you would like to learn more about gifting real property, please visit our previous posts.
Reference: nj.com (April 20, 2021) “What are the pros and cons of transferring a home’s title?”