Many older adults, without legal advice, choose to transfer their home to their children. For many, this is giving away ownership rights to one of, if not the, largest asset you own. But why?
Some do it because they worry about inheritance taxes. Some do it because they do not want the “nursing home to get it.” Often people really do not have the facts to do a complete analysis of the risks and benefits of transferring their home. Before you transfer your home to your children, understand there are a lot of different factors to consider before making such a big, and potentially irrevocable, decision.
There is no one size fits all answer as to whether it is right for you to transfer your home to your kids. But first, let’s get the inheritance tax and the nursing home issues out of the way.
Inheritance tax on transfers to children in Pennsylvania is 4.5% of the value of the asset. Not a huge number and easily offset by other potential taxes that may be higher. And if you go into a nursing home, the nursing home does not take your home. If you transfer the home more than five years before seeking assistance from Medicaid, the value of the house is protected. The nursing home will charge you until you become eligible for Medicaid, but they will not take your home. And often, if planning is done ahead of time, the home can be protected. Even at the last minute the house can be protected for your spouse.
Now let’s look at some of the risks of transferring the home to your children:
Capital Gains Tax:
If you own a home, each co-owner (two if married) has an exclusion of up to $250,000.00 in increase in value for capital gains tax purposes. If a married couple has a primary residence that has increased in value by $300,000.00 between the date they purchased it and sold it (assuming they lived there more than two years), they will not pay any capital gains tax on the sale.
Were they to transfer the home to their son while they are alive and he later sold it, he would be charged capital gains tax, up to 20%, on the difference between the adjusted tax cost (basis) and the sale cost. That conceivably can be as much or more of a cost burden on the son than 4.5% on the entire value. Plus, if the house is received as part of the estate, its tax costs is adjusted up at death to the value of the property at death, potentially saving the son those capital gains dollars.
If you transfer property to your son or daughter, his or her creditors will have access to your home and can use your home to satisfy any debts he or she may have. This could include a lawsuit or it may be part of property considered in a divorce proceeding.
While most parents and their children retain a loyal, trusting relationship throughout their lives, sometimes external factors can change this. There are sad instances where I have received a call from a potential client who had a falling out with the child to whom they transferred their home and now the child is seeking to evict the parent. Some falling outs can happen because the child starts abusing drugs, has creditor issues, or other negative influences that cloud the child’s judgment. Before you transfer your home, be comfortable that this is highly unlikely to occur or you have retained enough assets to find another place to live in the event you find yourself homeless.
If you transfer your home (or any other asset of value) and need long-term care funded by Medicaid within five years of the date of the transfer, there is likely to be a penalty assessed on the value of the house and other assets that were transferred. This penalty, in the worst case scenario, can prevent you from accessing Medicaid funded care for far more than five years.
Before you make a transfer like that, have a contingency plan to assure yourself that your care needs will be covered, either through some sort of care plan with your children or retaining enough assets so that you can finance your own care.
If giving the home to a disabled child, be careful that any transfers to that child do not endanger his or her access to public benefits like Medicaid and SSI.
Before you make any significant financial transfers, you must consider all of the risks, as well as the asset protection benefits, before you make decisions you cannot revoke.
Understand that there are other options that may, depending on your individual circumstances, provide less risk and still accomplish your goals of preserving assets for your family. However, every situation is unique. To do a comprehensive estate and asset protection plan that provides maximum value to your family while ensuring you get the care you need, contact the asset protection attorney in Montgomery and Chester Counties at Slutsky Elder Law at 610-546-2746.