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I often have the question from clients: Is it a good idea to transfer our home to our children before we die? It is important to understand what is driving this question to help us better advise clients.I often hear that parents want to avoid probate, provide some inheritance to children and they hope to avoid the possibility of a future medical assistance claim on their homestead property.
The following are various concerns that parents should take into account before taking the major step of giving away their homestead. Many of these items are considerations for non-homestead property (i.e. hunting land or a cabin property), but it is less drastic than giving your homestead away. As a general rule, I do not normally recommend that clients transfer their homestead to children for the reasons below, as with any decision there are pros and cons to consider.
Loss of Control–If you re-title your homestead property to your child, you are giving up control of your home. Your child and (if married) their spouse would be the legal owners of the property and have full control of the choices related to that property. We recommend a rental agreement if you are planning to still remain in the property.
Non-Tax Consequences Creditor/Debtor – If your children and (if married) their spouse had creditor issues, you could lose your home. For example, if you child was in a car accident and they were sued, since your home is owned by that child, it could get pulled into that lawsuit and be lost.
Divorce/Death – Divorce or death is always a concern. I saw a case where parents deeded their house to son and son died unexpectedly. The daughter in law was then the legal owner of the property and kicked the parents out of the house. Or if a divorce were to occur, your homestead could be pulled into that division of assets. Mortgage – If you have a mortgage on the house and it has a due-on-sale clause (most do), the lender has the right to make the owner pay the loan in full if title is transferred without its permission. Most lenders are not likely to complain as long as the mortgage is current but it is a risk.
Medical Assistance – If a parent gives their home to their children, and are not selling it for fair market value, medical assistance (MA) will consider this to be an improper transfer and won’t pay for the parent’s long-term care (nursing home) during a period of ineligibility. The length of this period varies depending on the amount of the gift. MA has a five-year (60-month) lookback period for gifts that starts when the gift is made. Any application for MA made before the expiration of the 60-month period will trigger the ineligibility rules. During the period of ineligibility, the parent must pay for his own care. This means that an application for Medicaid should be avoided for at least 60 full months after the date of the gift.
Tax Consequences Homestead Status for Real Estate Taxes – If you transfer ownership to child and you continue to live in the property you will need to talk to the county to determine if you can continue to receive homestead tax exemption. You may not be able to claim any property tax refunds. Discuss with your accountant to determine the current rules.
Gift Tax – There are gift tax consequences if a person gives property worth more than the annual exclusion amount to any one person in any one year ($16,000 in 2022). No gift tax will be due at that time, but a gift tax return must be filed. Gift tax will be due at the person’s death if the estate is large enough. Discuss this with your accountant.
Income Tax Basis – If the house is gifted to children during lifetime, the children will have a carryover of tax basis, which means that they would have to pay capital gains tax on the increase in value from the time the parent bought it until it was sold. If the children inherit the property at the parent’s death, however, they would have a stepped-up basis, which means they only have to pay capital gains tax on the increase in value from the date of death to the date of sale. Depending on how much the property has increased in value while the parent has owned it (the amount of the gain), the gift may result in a large amount of capital gains tax due.
Income Tax Exclusion – In some circumstances, a homeowner may exclude $250,000 of gain upon the sale of their homestead. If you do not own the home, you are not eligible for the income tax exclusion if sold while you are living. Your child will have to pay capital gains tax on the gain. Discuss with your accountant to determine the current exclusion amounts.
How Can You Avoid These Problems? Transfer on Death Deed (TODD) – This type of deed transfers title to real estate after both parents have died. We prepare this deed now, record it, but it doesn’t take effect until both parents have died. This deed is revocable at any time up until the grantor’s death. It names one or more beneficiaries who will take title upon the grantor’s death, but conveys no current interest in the property. The recipients are not considered owners during the grantor’s lifetime, so their consent is not needed to manage the property. A TODD makes sense for people who have a small estate and want to give it to one or a few people, and who want to retain control of their assets but still avoid probate. A tranfer on death deed can help you avoid probate but it does not remove the asset from your estate for medical assistance purposes.
Transferring property to children during lifetime involves a variety of concerns. Be sure your review with attorney, financial advisor and accountant to identify the best option for you.
Please send any request for topic suggestions to rene@breenandperson.com. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.