Aging Options

Should parents transfer their home to a child?

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Are you considering transferring your home to your child while you are still alive?  Sometimes parents go this route because they want to reduce the taxable value of their estate; because they want to help their child out; because they want to qualify for Medicaid, or because they want to make sure the home stays in the family.  However, here are some reasons transferring that asset may not be the best option for either you or your child.

Tax-avoidance—If you’re thinking that estate taxes will take a giant bite out of your child’s inheritance, consider this.  In Washington state, estate taxes don’t kick in until the estate is worth more than $2.012 million (for 2014).  For a couple, that value doubles.  The federal estate tax exemption is $5.34 million (for 2014).  Again, that number doubles for a couple.   On the other hand, should federal or state gift taxes apply, the tax rate can be as high as 40 percent.

If the property changes hands as part of an inheritance (rather than a transfer), the child receives the benefit of a step-up in basis to the market value of the property at the time of the parent’s death.  If the beneficiary then needs to sell the property immediately, there is no income or capital gains tax on the sale.

Helping your child out—Some parents transfer their property to their children while they themselves continue to live in the house.  However doing so places the property and your ability to continue to live in it at risk of a divorce, bankruptcy and even the idiosyncrasies of a child who evicts you.   It also eliminates the possibility of using a reverse mortgage at some future date.

Qualifying for Medicaid—The cost of long-term care can far exceed the ability of most families to pay for it (a skilled nursing facility can cost as much as $100,000 a year or more).  One option is to qualify for government benefits such as Medicaid.  However, Medicaid is a need-based benefit and requires that the beneficiary spend down assets.  People hoping to meet eligibility requirements often look at gifting their resources but there’s a cost to doing so.  Medicaid rules disallow transfers of any assets within five-years of applying for benefits.  If a transfer has been made during that five-year period, that transfer for less than the fair market value generates a penalty period that could potentially cost far more than the intended savings.

In addition, Medicaid allows assets including a home and other property for the benefit of a spouse so transferring the home may result in turning an allowable (and therefore exempt) asset into a liability that may disqualify you from receiving Medicaid anyway.

If a child provided care for two years or longer that prevented you from entering a nursing home, Medicaid allows the transfer of the house.  So, if this is an option for you, make sure you do it correctly.  Please read our white paper on Medicaid Transfers.

Keeping the property in the family—For many people, their home is the only real asset they own.  Protecting the home then becomes the most important issue for the parents.  Selling your home to your child can result in fees and taxes so many people mistakenly believe they can gift their home to their child by either gifting it outright or by adding the  child’s name to the title.  But any transfer of ownership triggers the “due on sale” clause of a home loan unless your home loan is assumable or more happily already paid off.

Transferring a home to a child can be disastrous but as with most things there may be good reasons to move forward with doing so.  If you’re looking for a workable solution, consider hiring an Elder Law Attorney.  He or she can help you navigate through the reasons you want to transfer the property and create a workable solution so you won’t be in over your head.





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