Are you considering transferring your house to your child? Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC, LLC , wants to make sure you know all the facts before making that kind of decision.
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 doesnโt live there. The parentsโ estate is otherwise worth less than $1 million.
Nj.comโs recent article entitled โWhat are the pros and cons of transferring a homeโs title?โ 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 isnโt a worthwhile rationale to transfer the house to a child.
The transfer of the house to a child who doesnโt 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. Thatโs 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 basisโthe basis will be the value of the house at the date of the parentโs death.
If the parent transferring the house retains a life estateโthe right to live in the house until he or she passes awayโthe 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 childโs remainder interest in the house may be subject to capital gain taxes.
Last, transferring your house to your child who has financial troubles could cause a big problem. The childโs creditors may be able to force your child to sell the house to pay his debts. When it comes to your estate, get advice from an experienced estate planning attorney like Beck, Lenox & Stolzer. What sounds like a good idea may have some negative consequences for you and your child.
Reference: nj.com (April 20, 2021) โWhat are the pros and cons of transferring a homeโs title?โ