Clients often tell me that they want to transfer their house to their children or add a child’s name to their deed because they want to protect the property from a forced spend down or a Medicaid lien in the event they need long-term care. However this is not an action that should be taken in haste. There are significant consequences to such a transfer and these should be examined carefully.
Here are five things to consider before putting your child’s name on the title to your house.
- You will be subjecting your property to the reach of your children’s creditors. If your child’s name is on your home as an owner, your home is subject to the reach of your child’s creditors such as a divorcing spouse, bankruptcy, lawsuit, judgment, unpaid debt, etc. If your child owns an interest in your home, your child’s creditors may place a lien against the property and you would not be able to prevent that from happening. In any event, before deciding to make your child an owner of your property, have a frank discussion about any skeletons that may be lurking in your child’s closet – Is there a possible divorce on the horizon? Did your child personally guaranty a loan for his business that is now floundering? Is your child in trouble with the IRS? If the answer to any of those questions is ‘yes’ or even, ‘maybe’, adding that child’s name to the deed to your house is not in your best interest.
- You may lose the right to exclude the capital gain on the sale of the property. The current income tax laws allow a person to exclude up to $250,000 of capital gain on the sale of her primary residence provided she has owned and occupied the property for two out of the five years prior to the sale. This is an excellent tax benefit for people who have owned their home for a long time and have seen the value increase significantly. For example, someone who purchased their home in the 1970s for $50,000 and sells it now for $300,000 would have a capital gain on the sale equal to $250,000 ($300,00 – $50,000 = $250,000). However, no tax would have to be paid on that gain provided the seller owned the home and occupied it as her primary residence for two out of the five years preceding the sale. If the home is transferred to the children, then the parent seller would not be the 100% owner of the property at the time of the sale. If she retained a life estate when she transferred it to the children, or if the children were added as co-owners with the parent, then a portion of the gain would be tax free but the portion of house deemed owned by the children would be subject to capital gains tax (unless the children were living in the home).
- Once you do this, you cannot unilaterally undo it. If you transfer your home to your children, or add their name to your deed so that you are co-owners of the property, you cannot unilaterally change this. If you change your mind about the transfer and decide you want to be the sole owner of the property, your children must sign a deed conveying the property back to you. Even if you have the best children in the world and you are not worried that they would refuse to do as you ask, you still need to be concerned about factors beyond your child’s control such as your child being sued, getting divorced, filing for bankruptcy, becoming disabled, etc. Any of those events, as well as a host of other troubles, could prevent your child from being able to transfer the property back to you free and clear of the claims of your child’s creditors.
- If not done properly, your children will lose the stepped-up tax basis in the property. One of the tax breaks that truly helps the middle class is the stepped-up tax basis that occurs when someone dies owning an appreciated asset. The tax basis of an asset is the starting point in determining the amount of gain realized on the sale of a capital asset such as stock or real estate. To calculate the tax basis of a home, you start with the purchase price, and add the cost of the capital improvements made to the property. For example, if mom and dad bought their home for $50,000 in the 1970’s and made $100,000 of capital improvements over the years (i.e. a new roof, new kitchen, replacement windows, etc.) the property now has a basis of $150,000. If property with a $150,000 tax basis is sold for $350,000 there is a capital gain of $200,000 ($350,000 – $150,000 = $200,000) and that is the amount on which capital gains tax must be paid (but see number 2 above for an exemption on the sale of a primary residence). However, if the property is still owned by the parents when they die, then the children will inherit the property with a ‘stepped-up’ basis. This means that the children’s tax basis in the property is its fair market value when the last parent died. In this example, it means that if the children sell the house for $350,000 then the gain on the sale will be zero ($350,000 – $350,000 = $0) and thus there would not be any capital gains tax to pay. However, the stepped-up basis is only available if the property is owned at death. If the parents deed their home to the children during their lifetimes, then the parents do not own it at death and therefore the basis is not stepped-up. In that case, the children are stuck with their parents’ basis, $150,000 in this example, and will pay capital gains tax on the difference between the sale price and the parents’ basis.
- You will incur a 5-year ineligibility period for long-term Medicaid benefits. One of the main reasons for transferring the home to children is to protect the property from having to be spent down to pay for the parents’ long-term care expenses or to avoid the imposition of a lien on the property by the state in the event a parent receives Medicaid (MassHealth) benefits. The Medicaid eligibility rules disqualify a person from being eligible for long-term care Medicaid benefits if the applicant or the applicant’s spouse gives away assets within five years of applying for benefits. Deeding property to children or adding your children’s names to your deed is considered a disqualifying transfer. Because of this it is very important to carefully consider the ramifications of a transfer before making it, especially for married people. There are currently laws in place to protect the spouse of a nursing home resident from having to impoverish herself paying nursing home bills. However, a transfer of assets within five years could wipeout those protections.
While transferring the home to children can be a good way to protect the home from liens or spend down due to a parent’s long-term care needs, it is vital to consider the consequences of such a plan before rushing in. Consult with an experienced estate planning and elder law attorney to fully understand the advantages and disadvantages of such a transfer before signing away your home.
Attorney Suzanne R. Sayward is a partner with the Dedham firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit www.ssbllc.com or call 781/461-1020.
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