I routinely have clients ask me if they should transfer their home to their children. The question is often posed like this: “Before she died, my grandmother transferred her house to my mother. Should I now transfer my home to my children?” Well, the answer is, it depends.
In many instances, this is an effective transaction for both the client and children, but in others, it may not be the best idea. Before making any such transfer, it’s important to understand and consider a multitude of issues involved in that decision.
To determine if it’s prudent to make such a transfer, I ask the client a series of questions on topics ranging from their health, their finances, their family - and the same of their children. It’s also important to consider the following questions: Is the home an essential asset to the client? Are the children financially stable? Would the children’s ownership impact the parent’s ability to utilize the home in the future? Does the home suit your current needs and will it in the future if your health changes? Will you need the equity in the home to pay your bills in the future? Will you want to sell this home and buy another? Due to these issues, an examination of the financial situation of the client and family dynamics is critical before any such transfer is made.
The next set of issues to consider are more topical. What are the goals and reasons for such a transfer? A common response to that question is, to “avoid probate” or to “avoid the nursing home from taking my house.” In considering such a transfer, we need to explore topics such as probate administration, long term care planning, income taxes, estate taxes, gift taxes, asset preservation, and liability concerns. Only after examining those issues can we determine if the transfer of the home is an appropriate action for you.
Procedurally, transferring all or a portion of your ownership in your home to a child or any other person requires that a deed be prepared and recorded on the land records in your town. Note that there a several options regarding the transfer. For example, an outright deed transfers your entire ownership interest in the property without any retention of rights on your part. Another example is a deed with a retained life use that transfers the remainder interest in the property to the children while you keep the right to live in it for the rest of your life. The type of deed affects answers to the topical questions posed above.
“I don’t want my children to have to go through probate when I die.”
Adding a child to the deed of your house creates joint ownership between you. If done properly, this means that upon your death, your child, as the surviving co-owner, will own the entire property. The deed and the joint tenancy it created serve as the mechanism whereby the house is transferred to the surviving co-owner. As a result, this means your Last Will and Testament is irrelevant to the transfer as the deed controls the transfer. It also means that if you want multiple children to share in the value of the house, then you need to name multiple children on the deed, not just in your Will. If you have a significant number of heirs with whom you want to share the value of the home, rather than use a deed, it may be preferable to have the house pass through probate and under your Last Will and Testament to the multiple heirs, or by implementing a Revocable Living Trust to do the same.
“I want to avoid the nursing home taking my house if I get sick.”
To date I haven’t had a client with an infallible crystal ball. This means trying to predict what your long term care costs might be, if any, are very difficult. There is no guarantee you will ever need any long term care, and if you do need it, then for how long and at what cost? The average cost of a one month stay in a skilled nursing home in Connecticut is over $14,000. That totals $168,000 for one year and $840,000 for five years. The average stay in a nursing home is about 2.7 years.
If you can’t afford to pay for your own care, Medicaid will pay for it. However, the rules to qualify for Medicaid require you to expend most of your assets to privately pay for that care before you are eligible for Medicaid. In that regard, transferring the house to the children may make sense to avoid those staggering costs and preserve the home’s value for them. However, before you decide to transfer the house to the kids, it’s important to note that several exceptions exist to the rules that might require the house to be sold to pay for your care.
If you have a spouse who will continue to reside in the home after you are transferred to a skilled nursing home, the house will generally be an asset exempt from the Medicaid spend down rules if transferred to or owned by that community spouse. Similarly, a transfer to a disabled child, or a transfer to a child who lived with you and provided you with care that kept you out of a skilled nursing home for the past two years, would not incur a Medicaid penalty. In all these circumstances, the home does not need to be sold to pay for your care and can be retained by your spouse or caregiver child.
It's also important to understand that when you transfer the house can be as important as if you transfer the home. The Medicaid rules provide for penalties for transfers (gifts) of assets made within five years of you needing Medicaid to pay for your long term care. The general rule is that you are ineligible for Medicaid for one month for each $14,000 that you give away. If your home was valued at $280,000 when you transferred it to your child, you could be ineligible to have your long term care costs paid for by Medicaid for 20 months. This means that once you are otherwise out of money, Medicaid still won’t pay for your care for another 20 months.
“No income taxes should be paid upon the sale of my house.”
If you need to sell your home and you have used it as your principal residence for two of the past five years, then you are eligible to exclude up to $250,000 ($500,000 if married) of gain on the sale of the residence. This income exclusion often means that many of you would not pay any income taxes on the sale of your home.
However, if you transfer the home to your children, unless they are using it as their personal residence, they have no such gain exclusion. This often results in taxable income on the sale of the house when the children later sell it when you no longer live there.
In addition to the loss of the gain exclusion, the children will have a tax basis in the residence equal to your investment in the home for determining the amount of taxable income. For example, if you bought your house for $75,000, and gifted it to the children, they now have a tax basis in the home of $75,000. If the home is sold by them for $375,000, there is a $300,000 taxable gain that the children will pay taxes on. By comparison, if you owned the house and transferred it to them upon your death, their tax basis would be equal to the fair market value of the home on your date of death. If we presume they sell it shortly after your passing when the value is $375,000, then they have a $375,000 tax basis and zero gain on the sale.
A properly drafted deed with a retained life use can assist in minimizing the income tax effects as the complete ownership of the property is received by the children only after you have died. Under this scenario, the children do receive the income tax basis adjustment up to fair market value on the date of your death.
“I can avoid estate tax at my death by gifting the house to my kids during my lifetime.”
Currently you have the ability to transfer during your lifetime and upon your death a total of $12,920,000 for both federal and Connecticut purposes. Most folks are not subject to the estate and gift tax as a result of these high exemption amounts. However, if you did exceed those exemption amounts, gifting it to the children could result in estate tax savings on the appreciation of the value of the home from the date of gift until your death.
It's also important to note that although the high exemption amounts may mean no tax is due, that doesn’t excuse you from the need to file a gift tax return upon the transfer of more than $17,000 to any one individual per calendar year. This means that if you transfer your home to your children, you will likely need to have prepared and filed a gift tax return reporting the value of the gift as it will exceed $17,000.
“I will still own my house even if I give it to my kids.”
Not really. The new owners of your house (your children) may continue to allow you to stay in and utilize the house. However, the children are now the legal owners of that property, and to the extent that they desire, they could charge you rent, they could evict you from the property, and they could sell it.
If the children sell the home, keep in mind that they are the owners, and they are the ones who will receive the proceeds from the sale. This is an important consideration if you think there could be a possibility that you might need the equity from your home to downsize and buy another home, pay a deposit into a senior care community, or even pay for in-home care.
If the children own the home, also consider that this is now an asset that they own. It is now available to be used to pay their creditors. Consider the impact on you and the loss of your home if the child files for bankruptcy, gets divorced, is arrears in child or spousal support payments, injures someone and incurs a personal liability, fails to pay their taxes, and more. Similarly, the children need to look at the reverse side and consider that as owners, they could now be subject to liability if there is a personal injury or environmental liability on the property. In addition, since this is now an asset the children will own, it should be disclosed on college tuition assistance applications, which may impact financial aid that their children might otherwise be eligible for.
Finally, you should also consider what might happen in the event you have transferred your home to your children and they die before you do. Who now owns the home? An in-law? Your grandkids? Some charity? Will the heirs of your children continue to allow you to live in the property? Well, it depends . . .
As you can see, there are numerous issues to consider before embarking on the transfer of your home (or any other asset) to your children. Before doing so I encourage you to seek out the advice of a knowledgeable attorney to counsel you on this process.