Whether it’s to qualify for Medicaid, to avoid probate, or to reduce your tax burden, transferring ownership of your home to your adult child during your lifetime may seem like a smart move. The move, however, can come with serious unintended consequences. Before signing over the title to your home, be sure to consider these factors. If you have additional questions, or would like to discuss transferring a property, schedule a 15 minute phone call with us and we’ll get you scheduled for the appropriate appointment!
1. Your Eligibility For Medicaid Could Be Jeopardized
With the cost of long-term care skyrocketing, you may be worried about your (or your senior parents’) ability to pay for lengthy stays in an assisted-living facility or a nursing home. Such care can be extremely expensive, with the potential to overwhelm even those with substantial wealth.
As neither traditional health insurance nor Medicare pays for long-term care, families often turn to Medicaid to help cover the costs. Medicaid has strict financial limitations, however – only those considered low-income are eligible. If you are a senior in North Carolina, for example, you must have less than $2,000 in assets (for an individual/ household of one). And while a primary residence is often (but not always!) exempt from the asset limit, it can still be claimed by Medicaid’s estate recovery program after the recipient’s death.
To be eligible for Medicaid or protect a home from Medicaid’s estate recovery, some seniors decide to transfer ownership of their residence to their children. Though this strategy is tempting, it can significantly delay – or even disqualify – one’s Medicaid eligibility.
Medicaid has a five-year “look-back” period for eligibility. This means that before you can qualify for Medicaid, your finances will be reviewed for any uncompensated transfers of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility.
In North Carolina, this penalty period is calculated by dividing the amount of the uncompensated transfer by, more or less, one month of private nursing home care or $7,110.00. This means that for every $7,110 worth of uncompensated transfers made within the five-year window, your Medicaid benefits will be delayed for one month. If you transferred the title to a home worth $300,000 within the look-back period, your Medicaid benefits would be delayed for about 42 months – or 3.5 years!
If you are considering applying for Medicaid and are worried about your residence, schedule a consultation with Susan Hunt Law to discuss planning and strategies.
2. Your Child Could Be Stuck With A Massive Tax Bill
By transferring a property to your child before you die, you may think that you are saving them money by avoiding probate. Unfortunately, property can be a very expensive gift to give. Transferring ownership of a home in this way can potentially create a huge tax liability for your child.
If you’ve owned your house for a long time, its value has likely increased dramatically. If you gift your home to your child, he or she will have to pay capital gains tax on the difference between your home’s value when you purchased it and the home’s selling price at the time your child sells it – that could be a significant tax bill.
In contrast, by transferring your home at the time of your death via your estate plan, your child will receive what’s known as a “step-up in basis.” This tax savings allows your child to pay capital gains taxes based only on the difference between the value of the home at the time of inheritance and its sales price.
For example, say you originally purchased your home for $80,000. When you die, the home has appreciated in value to $250,000 and your daughter inherits it upon your death. Five years later, she sells it for $300,000. With the step-up in basis in effect, she would only owe capital gains taxes on the $50,000 of difference between the home’s value when it was inherited and when it was sold.
However, if you transferred ownership of the home to her while you were still living, your daughter would lose the step-up in basis, paying a capital gains tax for the entire $220,000 of appreciation. And capital gains tax is only one kind of tax that could be impacted by a transfer of your home during your lifetime – you may also destroy valuable property tax basis, which could cause a re-assessment of your home for property tax purposes.
There are much more effective ways to avoid probate using estate planning, such as by putting your home into a Revocable Living Trust. At Susan Hunt Law, property transfer is always discussed in our Family Wealth Planning Sessions – if you need to do your estate planning, you can schedule a complimentary session today.
3. Your Home Could Be Vulnerable To Debt, Divorce, Disability, & Death
There are yet other factors to consider before transferring ownership of your house to your child. If your child takes ownership of your home and has judgments or significant debt, for example, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts. At a minimum, those debts will become a lien against the property that will accrue interest and must be paid before the home is ever sold.
Divorce is another thorny issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, the settlement decree may force your child to sell the home or pay his or her ex spouse a share of the home’s value.
The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise their eligibility, just like it would your own. And if your child dies before you and owns the house, the property could be considered part of your child’s estate and end up being passed on to your child’s heirs, leaving you homeless.
There’s Simply No Substitute For Proper Estate Planning
Before gifting your house to your children, schedule a complimentary Family Wealth Planning Session with Susan Hunt Law. We can help you find much better ways to qualify for Medicaid and other benefits to offset the hefty price tag of long-term care, and we can design an Estate Plan that will keep your family out of court and conflict.