Spotlight On Elderlaw
Many clients ask us if it is a good idea to give their home to their children, usually the intention is to protect the value of the home from long term medical costs. While it is, of course, possible to do this, transferring a house can have major tax consequences, among other unintended results, unless done properly.
When you give anyone property valued at more than $13,000 in any one year, you have to file a gift tax form. Also, under current law you can gift a total of $5 million over your lifetime without incurring a gift tax. If your residence is worth less than $5 million, you likely won’t have to pay any gift taxes, but you will still have to file a gift tax form. (And Congress may change the gift tax exemption, which is now scheduled to revert to $1 million at the end of 2012 unless Congress acts.)
While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes.
The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient.
For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000.
If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.
Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be “stepped up,” which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.
Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of longterm care. There are other options for giving your house to your children, including putting it in a trust or selling it to them (for fair market value). Before you give away your home, consult your elder law attorney, who can advise you on the best method for passing on your home.
In our office, the preferred method of protecting one’s home is by transfer to an Irrevocable Trust. This type of planning requires transfer of the property to the trustee with all the required supporting documents and deed recording. The property will be outside of the lookback period for Medicaid eligibility after sixty months, or five years. Additional assets can be held in title of the trust as well. Liquid assets and/or real property fall within the lookback period if the asset or property was transferred within the five years immediately preceding nursing home placement. This type of planning can often be done in conjunction with the purchase of a long term care insurance policy (remember it does take five years to protect assets transferred, long term care insurance can be used during that lookback, or waiting period).
This type of planning requires the involvement of the property owner, the trustee, the attorney, and sometimes the assistance of the client’s financial advisor or accountant. Once the trust is completed and the assets transferred, the effort is well worth it to protect one’s home and savings from potential nursing home costs!
If you have any questions about this type of planning, or other estate planning matter, please do not hesitate to contact our office, we would love to speak to you!
We can be reached at 1-718-738-8500.