Beware the Oft Spoken Line to Seniors: “Transfer Ownership of Your House to Your Kids!”
Should parents transfer their home into their adult children’s names, deeding the house to their kids? This is one of the most common questions that comes up when discussing estate planning with families.
In fact, oftentimes families assume that this preferred and correct handling based on the “advice” you or your adult kids have received from well-meaning friends and family—even the internet. The intention of a transfer is always the same. You and your family want to preserve your family home from a required spend down of your assets should you need extensive medical care in a nursing home or acute care facility.
The fact is, no two families are alike. Don’t sign a deed transferring your house to your kids without taking these important first steps: Have conversations about appropriately protecting your assets with your family and then post haste make an appointment with your estate attorney. Recognizing the potential risks of arbitrarily transferring ownership of your home to your kids will give you a clearer picture of why a willy-nilly transfer is a really bad idea.
Timing is Everything
It may be too late to consider a transfer if a diagnosis of an illness or condition has just been made. Medicaid looks back five years for major financial transactions. If the goal is to reduce your assets so you can qualify for Medicaid, remember that Medicaid will review financial transactions over the last five years. The transfer of a home within this 5-year window constitutes a red flag and may disqualify you from Medicaid nursing home coverage unless there are sufficient other assets to cover the costs during the 5-year period.
Emotional Decision-Making Won’t Do
Having your adult children help you with your financial needs late in life can be challenging. Your emotions do not always help you make the best decisions. A desire to keep the long-time family home in the family or, perhaps less charitably a sense of entitlement on the part of some or all of your children who believe that it should be the family legacy, do not typically lead to sound actions. There are many laws and rules to navigate, and time may not be on your side. Plus, the decision cannot be one-sided. If you are capable of sound decision-making, your wishes combined with the guidance of your estate attorney, financial advisor, or CPA must agree on the best course of action for you and your family. Allowing your kids to be privy to these conversations and have a voice is also a good strategy for family harmony.
Uncle Sam Comes Calling
Transferring your principal residence to a family member may disqualify you from part or all of the capital gains tax exclusion on the sale of the residence and cause unnecessary income tax liability when the residence is sold in the future. Consider the hefty tax bill for either a parent or their children from a capital gains tax on any gain (e.g., profit) on the house sale if you lose the exclusion and your family decides to sell the house during your lifetime.
Is a Life Estate Deed the Answer?
Individuals often think they achieve the best of all worlds if they establish a transfer of real property through a life estate deed. A life estate deed permits a property owner to have full use and occupancy of their property until their death, at which time your home will be transferred to your children. Because life happens, there are any number of potential pitfalls:
- Your home becomes exposed to the financial problems, liens, and creditors of all the joint owners; what if, for example, one of your children or their family members claimed bankruptcy
- A child or their family member could have a serious accident and if their insurance does not cover the cost of care, liens could be placed on the house
- Your child could become divorced, putting your home at risk as part of the marital settlement
- You may decide you don’t want to live in the house anymore and would like to sell it, but you are at the mercy of your children’s agreement with this decision
- You may want to make repairs to the house to accommodate your aging in place needs, and your children ignore your request for repairs not wanting the financial responsibility associated with those repairs; your children have the right to do this
- Your child could predecease you and the house becomes part of your deceased child’s estate subject to probate of that estate
Appropriate Transfer of Home. Get Guidance First.
Indeed, there are situations in which a transfer will work. For example, Medicaid sometimes recognizes a caregiver child exception that allows you to transfer ownership of your house, provided the adult child has lived in your home for at least two years and provided a level of care that prevented you from required nursing home care. That said, the transfer of the home through a life estate deed would cancel the caregiver exception.
A Trust is another—if not the best way—to transfer home ownership from you to your children. When the house is transferred to the Trust, you establish directions for the administration of the Trust and appoint a Trustee who is required to protect your interests.
Still in either of these situations, the counsel of your estate attorney in collaboration with your financial advisor, and CPA are the professionals best equipped to assist you with these specific situations.
At Phelan, Frantz, Ohlig, & Wegbreit, LLC, we are available to answer your questions, inform you of your options, and guide you in both your decision-making and the transfer implementation if all parties determine that a transfer is in your best interests.
Call us at 908- 232-2244 and enjoy the peace of mind of knowing that you are backed by support and knowledge in making informed decisions.
To Transfer or Not: Should You Deed Your House to Your Adult Children?
Thorough Research, Careful Evaluation and Attorney Consult Can Help You Decide
“Should aging parents transfer their home to their adult children?” You’ve probably heard others, perhaps even your friends, ask this question. This is a topic that also frequently makes the news.
The answer: There is no one “right” answer. No easy answer.
The best guidance is to diligently do your homework and consult your estate attorney. Research the pros and cons of a house transfer from a parent to an adult child. Then, determine how the implications of the transfer will apply to your particular family situation. It’s only then that you’ll be positioned to make a decision that works for you and your family.
Preserving assets: a top priority
The most important consideration is to preserve assets. A house is typically your largest asset, especially if your mortgage is fully or significantly paid off. It is, therefore, undesirable to put a drain on any of your assets while you are alive but in need of the long-term care that can bankrupt you financially or force you to sell your house. In these situations, people often wish to seek relief by turning to Medicaid, the joint federal and state program that helps people with limited income and few assets cover health care costs.
Puzzling over Medicaid and some misconceptions
People often think they are ineligible for Medicaid coverage of nursing home costs and doctor’s bills simply because they own property or have some money in the bank. They believe that getting their home out of their own name will enable them to receive the benefit more easily and often use it as a go-to strategy. The reality is, however, that the transfer of assets can have wide-ranging impacts which, in the end, can impact your ability to be considered eligible for Medicaid. What’s required is understanding the rules and making a legal and financial plan, typically with legal and financial professions, to ensure they are met.
Medicaid eligibility requires that an individual’s combined assets be less than $2,000 in order to receive help with payment for care. In certain situations, your home is not considered a countable asset for Medicaid eligibility purposes, especially if you, your spouse, or a dependent relative continues to reside in the property.
Medicaid’s five-year lookback period is perhaps the largest factor that must be considered. Any gifts or uncompensated transfers that have been made in the five years immediately prior to the Medicaid application will result in a penalty period and delay eligibility for months, even permanently. Therefore, an ill-timed transfer could penalize an individual rather than enhance eligibility.
Still, there are circumstances in which it is legal to transfer a house, but these circumstances often come with a double-edged sword. You may freely transfer your home without incurring a transfer penalty to:
- Your spouse
- Your under 21-year-old-child who is blind or disabled
- Your caretaker child who has lived in the house for two years prior to your entering an acute or long-term care facility can also be the legal recipient of a transfer, as long as that child provided care to you during that two-year period.
That being said, Medicaid can put a lien on your house for the amount of money spent on your care. Similarly, if the house is sold while you are still alive, you will likely have to satisfy the lien by paying back the state. There is also an option called estate recovery which under certain conditions allows the government to recover the cost of your care from your estate.The appropriateness of a decision to transfer one’s home for Medicaid purposes is one with which many seniors and families struggle. More often than not, it’s a choice dependent on an individual’s unique circumstances and the real-time monetary values involved in a situation.
For example, a typical scenario which could favor moving the home out of a couples’ name may involve a 70-year-old couple, say, a healthy wife and a husband suffering with Alzheimer’s. The cost of the husband’s long-term care may be exorbitant and the wife will need money to live on herself. And there is always the desire to leave a financial legacy of their hard-earned money for their kids and grandchildren.
Avoiding a hefty tax bill with a Will or Trust
Taxation is another reason you may give thought to transferring your home to your adult children. In lieu of simply handing over the deed to your son or daughter, there are other ways to transfer your home out of your name. The fact is that gifting your home can involve a hefty bill that taxes your son or daughter on the capital gains derived from your home’s increased market value.
Say you bought your home 50 years ago for $25,000, and now it’s worth half a million dollars. That $475,000 increase comes with a huge tax hit for your kids on the capital gains earned between the purchase price and the current market price. That tax could be avoided if they inherit the property after you die. In the latter scenario, your kids will receive what’s called a step-up basis equal to the value of the house at the time they inherited it rather than the value of the house at the time you purchased it.
People are also skittish about probate and sometimes rush to judgement and transfer their home willy-nilly to their kids. In reality, in most states—New Jersey among them—probate is nothing to fear. In fact, most states even have simplified probate procedures for smaller estates. If you are really worried about probate, you can also establish a living or revocable trust to avoid probate—not estate taxation—but this may not really be necessary depending on the cost and complexity of probate in your estate.
Probate is quite expensive and time-consuming in only a few states, such as California and Florida. In those states, as well as in the situation in which you own homes in more than one state, you may want to work with your estate attorney to develop strategies for wealth transfer. In general, however, many individuals perceive probate as something much more daunting than it actually is.
Trusting your kids: a must
One of the most important considerations for you when reflecting on how to treat your home centers on the conversations you have with your children about your intentions regarding your assets. If your objective is to keep the house in the family, it’s essential that you trust that your adult children are aligned with that value especially while you are alive.
This goal is often compromised when adult children live out of state and feel increasingly detached from the home in which they were raised. They could also be facing their own, sometimes extreme, financial difficulties which could subject your home to liens and/or require your adult child to sell your house to satisfy his or her creditors.
Then, too, if your child divorces, your house could be considered an asset to be divided or dealt with as part of the property agreement with his or her former spouse. Finally, there are health situations in which a transfer could work to your adult child’s disadvantage. Your grandchild, for example, could become disabled and require Medicaid or other government benefits. The fact that your adult child owns your house could prevent your grandchild from qualifying for those benefits.
At Phelan, Frantz, Ohlig and Wegbreit, LLC, we are here to help you navigate these challenging conversations and decisions so that you can better evaluate your options and determine the best way to preserve your assets, among them your home. We will help you gain clarity around your unique family situation and will work tirelessly to guide you to effective strategies that will best serve your wishes and the future needs of your family.
Call us at 908.232.2244 to schedule an appointment and ensure that the legacy you leave to your loved ones fulfills your every intention and keeps the best interests of you and your family top of mind.