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 (such as nursing home and home care). While it is, of course, possible to do this, transferring the title to one’s home can have negative tax consequences, among other unintended results.
When you give anyone property valued at over a certain amount (in 2014 $14,000 per person, per calendar year,) it is necessary to file a gift tax form. Also, under current law you can gift a total of $5.34 million over your lifetime without incurring a gift tax.
While you may not have to pay gift taxes on the gift, if your children sell the house right away, the sale will be subject to taxes, which may be quite steep. The reason for this 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 minimize 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 per person named on the deed of the capital gains from taxes.
Inherited property is not taxed the same way 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 to finance future long-term care costs. 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 for tax purposes, as well as for protecting the value of the home from potential long term care costs.
Transfer of title to one’s home to an Irrevocable Trust will protect the value of the home from long term care costs. 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 60 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!
This article is for general information, and should not be substituted for individual legal advice.
If you have any questions about this type of planning, or other estate planning matters, please do not hesitate to contact our office, at 1-718-738-8500.