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.
When There’s More Than 1 Sibling, What Happens to the Inherited Family Home?
My estate shall be divided equally among my 3 children. That’s probably the most common final directive in a last Will and Testament. But what happens when most, if not all, of an estate’s assets are real property. Think: the family home. The most common property siblings jointly inherit is a house. How do you divide that very tangible asset among 3 people?
In a best-case scenario, the siblings would agree unanimously on a fair and equitable settlement: Sell the home and split the proceeds equally. Distribute other assets so one heir retains the property or negotiates buyouts for those wanting cash.
Flaws of Nature
But human nature isn’t always so rational…or even kind…especially when there’s a decent amount of money at stake. What happens when siblings are counting on an inheritance, or their financial needs are different? What if one sibling has devoted her life to caring for their parents? What happens if there’s already acrimony among the siblings in the first place?
Unfortunately, as is often the case, specific instructions regarding the disposal of the property are not provided in the decedent’s estate planning documents. Consider these situations which pour fuel on the fire: One sibling has lived in the home taking care of the parent and wants to stay but can’t qualify for a mortgage to buy the others out. Or the caregiver may have a financial windfall from the deceased outside of the will—perhaps in jointly held property, bank certificates, or as the life insurance beneficiary. This may seem fair, and probably is, but that added benefit bestowed upon the caregiver adult child causes dissension among siblings, who then resent having to give the caregiving sibling an equal portion of the estate. And sometimes a sibling with greater wealth will have an unfair advantage to acquire the home.
Those Essential Family Conversations
There’s no better example of the need for important family conversations when parents are still healthy and fully in command of their cognitive capabilities—no better example for the requirement for estate plans with Wills or trusts in which everything is stipulated in black and white.
Even more important is this admonition: “Parents should never divide an indivisible asset in hopes that it will bring their heirs together,” says Lee Hausner, a Los Angeles-based psychologist and author of Children of Paradise: Successful Parenting for Prosperous Families, an instructional book about handling family assets. She’s seen contentious situations—even fights between siblings that turn physical.
Ideally, in these situations, the siblings must amiably turn to a Plan B. Here are the most common options for splitting an inherited home with siblings when the estate planning documents do not provide for this contingency:
- Selling the family home: This is the easiest solution…selling and dividing the proceeds equally or according to the percentage interest each sibling has been designated by the Will or trust
- Renting the family home: Siblings may not be ready to sell the cherished long-time family home even though no one wants it or is geographically well-located to live in it. Renting the home to generate income which they can split among them is a viable option.
- Buyout: If one sibling wishes to keep the home and the other siblings do not, the sibling who wants the home can offer to buy out their other siblings’ interests in the property. In this case, the sibling who wants to buy the home may not be able to afford buying out their siblings’ shares. They could, however, arrange to do so through a private agreement to make payments with or without interest over time on the property. They could also take out a mortgage on the property.
Sometimes There’s No Sibling Resolution
Still, sometimes none or some of the siblings are not ready to compromise. The real nail in the coffin is when one of the siblings thinks they’re getting the short end of the stick—or their own spouse who is not a bloodline family member starts sharing poisonous ideas—and this sibling begins to make waves.
If all else fails and an agreement cannot be reached, the siblings may have to involve the court in order to force the sale of the property and terminate their co-ownership. In this case, heirs who want to sell the home file suit to force its sale against the wishes of those who want to keep it. An impasse like this is called a partition action and can be devastating to a family.
Some Prudent Counsel
There’s no denying the fact that estate planning in which parents and adult children speak openly about their plans, finances, and other important issues that could become factors is essential. Rules of thumb surrounding these talks include:
- Refrain from dividing an indivisible asset to bring siblings together. It’s been shown time and again that it won’t work. Instead, find a way to make up the difference with money or other assets.
- Encourage siblings to reconcile their differences and urge them to forgive before it’s too late and becomes an untenable situation.
- Communication, transparency, and fairness are paramount. Be as equitable as you possibly can. If not, you are asking for trouble not only for your sons and daughters but also for your grandchildren.
At Phelan, Frantz, Ohlig & Wegbreit, we can help you facilitate these important conversations and provide you with the thoughtful guidance on sensitive issues. This will help your heirs avoid acrimonious situations when you are gone.
Call us at 908.232.2344 to get your estate planning underway or to review it. Planning today will ensure a brighter future for your loved ones tomorrow.
USING A REVOCABLE TRUST TO PASS ON REAL ESTATE TO YOUR CHILDREN
Act Now to Prevent the Future Hassles of Out-of-State Probate
The concern is a common one: “I want to make it simple for my kids,” say aging parents of adult children. “I don’t want them to experience stress when the time comes to settle my estate.”
Estate attorneys have solutions to honor these wishes. These solutions are, in fact, quite simple to execute, provided they’re completed as part of your estate planning. Failing to attend to these matters during your lifetime may mean you are bequeathing not only an inheritance to your children, but also a probate nightmare, particularly if you own property in more than one state.
Jumping Through the Hoops of Probate in Several States
Many of our clients have a primary residence in New Jersey and own vacation homes or rental properties in other states such as Pennsylvania, Florida, or New York. If the goal is to pass these properties on to future generations in the simplest way possible, the focus should be on ways to avoid probate in more than one state.
States are possessive of real property located within their borders. Accordingly, the appointment of an executor in New Jersey is of little consequence outside of New Jersey. When it comes to the transfer of real property inside their state, individual states reserve the right to make their own determination as to who should be appointed pursuant to their state’s unique rules. And while New Jersey has a relatively straightforward probate process, other states do not. Going through probate in states like Florida and New York, for example, takes considerable time and money. Thus, effective estate planning that for individuals who own multiple properties often requires the implementation of a plan that helps families avoid having to institute probate actions in multiple states.
Transferring Property Into a Revocable Trust: Smart Estate Planning and Flexibility
There are various estate planning tools that can provide you with peace of mind knowing that your assets will be transferred seamlessly to your heirs. One such tool, a revocable trust, also known as a living trust, has multiple features that can benefit you during your lifetime and your heirs when it comes time to settle your estate. A revocable trust provides a prearranged mechanism that will ensure the continued management and preservation of your assets, should you become disabled. It can also set forth all of the dispositive provisions of your estate plan and detail how you want your assets to be disbursed. In addition, a trust protects your privacy and the privacy of your beneficiaries because unlike a Last Will and Testament, which is a publicly available document once probated, a trust is available only to the impacted beneficiaries.
Finally, transferring your various properties into a revocable trust will help your family avoid the nightmare of multiple probate actions and the corresponding costs of different lawyers in different states. Because you are the trustee of your living trust, you still have full authority with respect to how the property is used and managed during your lifetime and all income tax consequences are reported on your personal income tax return.
The creators or “grantors” of the trust, which can be either a single individual or a couple, can establish the terms that will dictate what happens to assets held in trust upon their death. To this end, successor trustees also are named by the trust, which ensures that the grantors’ designated agents have automatic authority to sell, transfer, and manage the property upon the grantors’ death without the need to seek court appointment. In short, when properties are owned or held by the trust, there is no need to probate a Will, whether the property is held in New Jersey or another state.
Further, revocable trusts offer a degree of flexibility. For instance, if you become incapacitated or ill during your lifetime, the successor trustee can step up to assist and run things, offering a seamless transition. In addition, other assets, such as bank or brokerage accounts, can be retitled into the trust. Many financial institutions prefer to manage assets held in this manner as it allows them to respond quicker in emergent situations and serve clients more nimbly than they would be able to if they had to wait for the production of a power of attorney or a court appointed guardian to provide instructions.
Additional Considerations for Rental Properties: Limited Liability Companies
We frequently counsel clients who have rental properties to place such property into a limited liability company (LLC). Property ownership, especially ownership of rental property, comes with the risk of liability from injuries that take place while on the property, leaving you and your assets vulnerable to claims and/or exposing you and your assets to the risk of lawsuits. If your property is held in an LLC, and it is the only asset in the LLC, your liability is limited to that property, and your other assets are shielded from judgment if the formality of the LLC is honored and assets are kept separate.
Holding properties in trust and an LLC are not mutually exclusive planning techniques. Instead, the property can be placed in an LLC for liability reasons and the revocable trust established for estate planning purposes can serve as the sole member of the LLC. In other words, the trustees hold the LLC and the LLC holds the property. Although the structure is akin to the Russian stacking dolls, it makes sense for a multitude of reasons.
In either case, the trust assets, in this case the property, can easily pass on to your heirs. The trust itself may also continue with the trust assets managed and payments continued to the trust’s beneficiaries. What’s more, if your heirs decide to sell the property, they can do so easily and earn and retain money for that sale.
Life Happens: Realtime Action to Prevent Future Hassles
It’s important to remember that taking action now will prevent issues from complicating your children’s lives in the future. At Phelan, Frantz, Ohlig & Wegbreit, we are here to help you pass your property on to your beneficiaries easily and cost-effectively.
Call us at (908) 232-2244 to develop an estate plan that will give you the peace of mind you need today, knowing your heirs will be well-protected tomorrow.
FIVE THINGS TO KNOW BEFORE MAKING AN OFFER ON YOUR DREAM HOME
At Phelan, Frantz & Peek, we love working with first-time home buyers and introducing them to the home buying process with its ups and downs, twists and turns. Here’s a sneak peek at the top 5 things we want our purchasing clients to know before they put in an offer:
1. START WITH A FULL LOAN REVIEW
In most cases, the lender pre-approval is only as reliable as the piece of paper its printed on. Many buyers wait to talk to their lender until they are far along in the process and often not until they have actually put in a bid on a home. A prospective buyer can start this process much earlier and when they do so, they should insist on a Full Loan Review (americanunited.com/approval-first/). Experienced lending partners will be able to facilitate this request. Once approved, the buyers can position themselves as a much more attractive purchaser in the negotiating process.
2. INSIST ON A FULL HOME INSPECTION
Even though every New Jersey real estate contract states that a property is being sold “as is,” buyers have every right to conduct a full home inspection to “kick the tires” and satisfy themselves that the home they are purchasing has no material defects. During the inspection period, a buyer should have the property evaluated by a licensed home inspector and a wood-destroying insects inspector. A radon test also should be completed by your home inspector.
3. SCAN FOR UNDERGROUND OIL TANK
In addition to a thorough home inspection, buyers should also invest in having the surrounding property scanned for an underground tank. Older homes may have had oil heat at one time or another. In many cases, owners had these underground oil tanks decommissioned by having them cleaned out and filled with sand, but leaving the tank itself in the ground. This method of decommissioning a tank is no longer industry standard because many were later found to have leaked and caused soil contamination even though they had been legally decommissioned. Buyers should invest the couple hundred dollars to have the property scanned to satisfy themselves that no tank exists and, if one does, insist on its removal and any associated remediation before proceeding to close.
4. TITLE INSURANCE IS WORTH EVERY PENNY
A title insurance policy protects the new homeowner from any loss suffered as a result of an issue with ownership of the land. These issues are rare, but may arise for a variety of reasons including a forged deed, undisclosed heirs having an interest in the property, mistakes made in the public record or fraud. The one-time premium is relatively minimal compared to the peace of mind such protection offers.
5. CLOSING DATE IS NOT SET IN STONE
A contract closing date is always an “on or about” date. It is practically impossible to settle on a fixed closing date weeks in advance given the many moving parts to a home purchase. There are home inspections to complete. Lenders require an appraisal and homeowners’ insurance, as well as a significant amount of financial information from the buyers. Title companies must be given time to complete their search. And Sellers often have their own agenda about when they will be vacating the property. It is your lawyer’s job to coordinate all these factors to make the transaction as uncomplicated as possible. The attorneys at Phelan, Frantz & Peek pride themselves on being accessible and responsive in order to make your home buying experience a positive one.
Spring Cleaning? Don’t Despair, Donate!
Spring is in the air! Those of us at PFP know that Spring is on the way when the weather starts to warm, buds sprout on the trees and our real estate transaction calendar grows. That also means many of our clients who are selling their homes begin to look for places to donate excess clothing or furniture. Whether you’re selling your home or engaged in good old-fashioned Spring cleaning and you’re not sure what to do with your unwanted but perfectly usable goods, we have some suggestions.
Here’s a list of charities in the Union County NJ area that accept donated goods:
Provides “everything that makes a house a home” to persons who were recently homeless.
Items accepted: furniture, linens and bedding, curtains, lamps, mirrors, pictures, rugs with bound edges, toys, dolls, games, small appliances, kitchen items, clothes and shoes.
Drop off only – Sundays at 24 Commerce St, Springfield Twp, NJ 07081. If you are not located in Union County, please check this website for information on similar organizations near you.
Pluckemin Medical Mission of the Pluckemin Presbyterian Church
Provides medical equipment to those in need.
Items accepted: hospital beds, wheelchairs, walkers, lifts, commodes, shower seats, bed rails, etc.
Drop-offs only at the church or as directed. Church is located at 279 US 202-206, Pluckemin, NJ 07978. Please call (908) 396-6057 for specific guidance on donations and drop-off hours.
Items accepted: vehicles (special arrangement required), flat screen TVs, clothing, shoes and boots, accessories, books, records, CDs, DVDs, games, toys (no stuffed animals), sports equipment, kitchen and housewares, small appliances, collectibles and décor, linens and bedding, hand tools and small power tools, consumer electronics (stereos, radios, VCRs, DVD players), some furniture, some computers and office equipment.
Drop off at 126 Route 22 West in Springfield NJ 07081 and other locations in Paramus NJ, Fairfield NJ, Pompton Plains NJ and Nanuet NY. Call (908) 912-0156 to inquire about pick-ups.