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.
How Much Can You Control Your Kids’ Lives from the Grave?
You want the best for your children, and you want them to inherit your assets when you die. But what happens when you don’t like your son- or-daughter-in-law? How can you prevent your kids’ inheritance money from being commingled with the couple’s marital assets? Can you still exert control from the grave? Should you?
In short, you can, by establishing a trust that prevents assets from passing directly to your child, which prevents the commingling of assets. And in the event one of your kids gets divorced, this trust may preserve these assets from being considered available for alimony obligations. Such a trust is designed to keep money in the family, protecting the inheritance of your children and their descendants. Specifically, assets in the trust can only be used for your children’s or grandchildren’s health, education, maintenance, or support.
Evaluate Your Motives
You may actually be surprised at the number of people who sit in our conference room and want to block their in-laws from touching the family inheritance. The first thing we do is encourage them to evaluate their motives. Is your distrust of a son-or-daughter-in-law based on your knowledge that your son or daughter’s spouse is a spendthrift, gambles, has difficulty holding a job, or treats your child and their children abusively, or similar scenarios? In this case, a trust like this can work to safeguard your assets for your children.
But if your motives are based solely on your dislike, or a fear that your kids’ marriages will end in divorce like 50 percent of all marriages in the U.S. do, you may want to think twice. The logistics governing the administration of the trust can get thorny. For starters, best practice encourages appointing an independent Trustee to administer this trust. The result is that your children’s withdrawal rights may also be limited.
In the Name of Love
If there’s income your kids are entitled to get every year or a draw on principal, the trust requires that they must ask the Trustee’s permission for the money to be distributed. Bottom line, while you’ve created a buffer that prevents your in-law from getting to the money, you’re also making it difficult for your son or daughter to access their inheritance. Even though you’re doing this in the name of love, your kids have to penetrate this barrier you created by going to the Trustee to get monies.
And aside from the inconvenience, what does that mean for your kids? How are they going to feel about that? How will they ultimately feel about you? You may not like your son or daughter in law, but your son or daughter may adore them. And despite what you think, they might have a very good marriage. Your feelings could actually throw a monkey wrench or certainly elements of mistrust into a good marriage. Additionally, even if your kids have to ask permission to get the money, distributions made by the Trustee may well be commingled anyway. So, you can never fully control the way your inheritance money is used. You can only make it harder.
Discuss Inheritance Decisions With Your Attorney
At the end of the day, you may not be the best one to decide whether or not inheritance money should be commingled with your kids’ marital moneys. Every situation is different. When you work with one of our attorneys at Phelan, Frantz, Ohlig, and Wegbreit, LLC, you can rest assured we will make sure you evaluate all the ramifications of your decision-making before you finalize your estate plan. We will also make sure you review your plan every 5 years or so, to make sure that it’s consistent with your perspective and the inevitable changes in your family situation.
Calls us at 908-232-2244 to ensure that the decisions you make today will work well for your loved ones tomorrow.