Q: Hi Leslie, we are getting older and my husband and I are not rich. Our biggest asset is our home. To make it easy on our kids after we die, shouldn’t we just transfer it to them now? We trust our kids and have other family members that have done this, and it seems to have worked well without much hassle.
– Emily C.
A: Hi Emily. Good question. This is a question we routinely get from clients and the answer is almost always absolutely not! This is also known (jokingly) around town in attorney circles as “Cuban estate planning” (or more generally “Latin American estate planning”) because this is so common in Latin culture to put your kids’ names on everything–my mom included! Here are just a few of the MANY reasons why this is almost never a good idea…
Capital Gains Tax
Your children may have to pay the Tax Man a lot of unnecessary capital gains tax. Especially if you purchased your home 30, 40 (or more) years ago. The price you paid for the house at that time was probably much less than its current value. For example, say that you paid $100,000 for your home, and it is now worth $250,000. If you transfer the house to your daughter and she later wants to sell it, she would have to pay capital gains tax on the difference between the price you paid for the house and the value it had at the time your daughter sold it—a difference of $150,000!
In the alternative, if you transfer the house through a will or a trust, your beneficiaries will receive what’s called a “step-up in basis” equal to the value of the house at the time they inherited it rather than the value of the house at the time you purchased it. You can see how much this can add up!
You could be prevented from receiving Medicaid benefits. There is a 5-year “look-back” period for Medicaid eligibility purposes. This means that when your Medicaid application is being reviewed, any gifts or “uncompensated transfers” that you made in the past 5 years will result in a penalty period. In 2018, every $6,422.00 worth of uncompensated transfers that you made in the past 5 years will result in your Medicaid benefits being withheld for one month. So if you transfer your home to your children and then require long-term care within 5 years of the transfer, Medicaid will consider this to be an uncompensated transfer. This type of transfer has the potential to delay your Medicaid benefits and possibly even prevent you from qualifying.
The 4 D’s: Debt, Disability, Divorce or Death
There are a few other reasons why it is never a good idea to transfer ownership of a parent’s house to their children while the parent is still living. If you transfer your home to your child with their own debts, then creditors could inquire as to the assets in that child’s name. If your house is in that child’s name, then creditors could make claims against that property to recover the debt owed to them.
Another potential issue is divorce. If you transfer your home to your child and then the child goes through a divorce, your house could be considered an asset to be divided or dealt with as part of the property agreement with his/her former spouse.
Additionally, if you child becomes disabled and requires Medicaid or government benefits of their own, owning your house could prevent him/her from qualifying for these benefits in the same way that it might prevent you from qualifying for benefits if he/she needs long-term care.
Finally, if your child passes away before you do, and you have transferred your home to him/her, then your house could be considered part of your child’s estate and distributed to his/her heirs instead of you.
Bad news all around.
A much better plan is to speak to an attorney who can help guide you through this and help you prepare an estate plan to plan for the future.