Whether it’s to qualify for Medicaid, avoid probate, or reduce your tax burden, transferring ownership of your home to your adult child during your lifetime may seem like a smart move. But it can be mistake with large consequences for everyone involved. Before you sign over the title to your home (or any other real property), consider the following potential risks.
1. Your Eligibility for Medicaid Could Be Jeopardized
Long-term care is expensive and overwhelming, and you may be worried about your (or your senior parents’) ability to pay for lengthy stays in an assisted-living facility or a nursing home.
Neither traditional health insurance nor Medicare will pay for long-term care. Many look to Medicaid to help cover the costs of long-term care, but in order to become eligible, your savings must be nearly exhausted.
You may have heard that if you transfer your house to your adult children, you can avoid selling the home to qualify for Medicaid. Some people think transferring ownership of your house will help your eligibility for this benefit and is easier and less expensive than passing your assets through estate planning.
This tactic can delay—or even disqualify—your Medicaid eligibility. In February 2006, Congress passed the Deficit Reduction Act, which included several provisions aimed at reducing Medicaid abuse. One of these provisions was a five-year “look-back” period for eligibility. Before you can qualify for Medicaid, your finances will be reviewed for any “uncompensated transfers” of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility. Any transfers made beyond that five-year window will not be penalized.
The length of the penalty period is calculated by dividing the amount of the uncompensated transfer by the average cost of one month of private nursing home care in the state you live in. Today, the average cost of nursing home care is roughly $10,000 a month. For every $10,000 worth of uncompensated transfers made within the five-year window, your Medicaid benefits will be delayed for one month. If you transferred the title to a home worth $500,000 within the 5-year look-back period, your Medicaid benefits would be delayed for 50 months.
If you transfer your house to your children and then need long-term care within five years, it could delay or prevent your qualification for Medicaid benefits. It is worth building a sufficient estate plan, which can address the rising costs of long-term care, to avoid this risk.
2. Your Child Could Be Stuck with a Massive Tax Bill
The potential tax liability for your child is another drawback of transferring ownership of your home. If you have owned your house for a long time, its value has dramatically increased, leading you to believe that by transferring your home to your child, he or she can make a windfall by selling it. You may think that if you transfer the property before you die, you can save your child the time and money required from probate.
Probate is the court process used to distribute your assets according to your wishes that you outlined in your will or by our state’s intestate succession laws. Probate can be a long and expensive process for your loved ones; however, that expense is likely to be relatively minor compared to the tax bill your heirs could face.
If you transfer your home to your child during your lifetime, he or she will have to pay capital gains tax on the difference between your home’s value when you purchased it and the price of the home when your child sells it. Depending on your home’s value, that tax bill could be quite large.
By transferring your home at the time of your death through your estate plan, your child will receive what’s known as a “step-up in basis.” This allows your child to pay capital gains taxes, based on the difference between the sales price and the value of the home at the time of inheritance, rather than the value at the time you bought it. Say you originally purchased your home for $80,000, and when you die, the home had appreciated in value to $250,000. Your daughter inherits the home upon your death, and then she sells it five years later for $300,000. With the step-up in basis, she would only owe capital gains taxes on the $50,000 of difference between the home’s value when it was inherited and when it was sold.
If you transferred ownership of the home to her while you were still living, your daughter would lose the step-up in basis and would face a capital gains tax bill of $220,000.
Capital gains tax is only one kind of tax that could be impacted by a transfer of your home during your lifetime. You may also impact property tax basis, which could cause a re-assessment of your home for property tax purposes, depending on the county or state your home is located in.
There are much better ways to avoid probate using estate planning, such as by putting your home into a revocable living trust, in which case your home would immediately pass to your loved ones upon your death, without the need for any court intervention. We can help you choose the most advantageous estate planning strategies to minimize your beneficiaries’ tax liability and ensure they get the most out of their inheritance, while allowing them to avoid court and conflict.
3. Your Home Could Be Vulnerable to Debt, Divorce, Disability, & Death
If your child takes ownership of your home and has significant debt, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts.
Divorce is another potentially thorny issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, the settlement decree may force your child to sell the home or pay his or her ex-spouse a share of the home's value.
The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise their eligibility, just like it would your own. If your child dies before you and owns the house, the property could be considered part of your child’s estate and end up being passed on to your child’s heirs, leaving you homeless.
There’s Simply No Substitute for Proper Estate Planning
Transferring ownership of your home to your adult child may not solve anything but could make things worse for your loved ones. We can help you address your concerns and still keep your family out of court and conflict in the event of your death or incapacity.
Our firm offers a variety of estate planning packages depending on your goals. We can help you protect and pass on your home and your family’s wealth and assets, while also enabling you to better afford whatever long-term healthcare services you might require.
This article is a service of Jennifer Winegardner of Rayboun Winegardner, PLLC. We do not just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love. That's why we offer a Family Wealth Planning Session,™ during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session.