Many of our clients come to us asking whether they should transfer their house to their children in order to avoid the possibility of a nursing home or Medicaid placing a lien on it. There are some occasions where putting the house in a child’s name might make sense.
However, there are a number of potential pitfalls. Transferring the family home to a trust is generally a better method of protecting your home, when protecting against future long-term care expenses.
When considering this question, most people are thinking of adding their children’s names to the title to their home as opposed to “giving” it to them. Transferring the house to your children involves the creation of what is known as a life estate. A life estate is nothing more than a statement on a new deed to your house that says the house is being transferred to your children and, you are reserving a life estate. The reason that you reserve a life estate is so that you can’t be ousted from your home. It’s clearly stated on the deed. So long as you are alive, you have the right to live in that house. No one can sell it out from underneath you, and no one can mortgage it without your consent.
If you add your children’s names to your deed, there are a couple of things that may become problematic. If your children have financial difficulties, then your children’s creditors may be able to put a lien on your residence. If the debt for which the lien is created is not paid by your children, then the creditors can bring an action to foreclose the lien. The creditor may not be able to force a sale of your house; however, this does create a legal scenario where you and your children may be at odds with one another, and it creates a conflict of interest.
Situations like this can also come about as a result of personal liabilities, such as an automobile accident where someone is grievously injured and there’s not enough insurance on your child’s vehicle to satisfy the injured party’s lawsuit. If that’s the case, your child’s stake in your house is now added as an asset to the list of assets against which the injured party’s attorney is going to be seeking a lien or compensation from.
Another issue to consider is capital gains tax. Capital gains tax is the tax that is paid on the difference between the purchase price of your house when you bought it, and the current sale price. If you are a married couple, the current tax law allows for an exclusion of $500,000 of capital gain. So if you buy your house for $100,000 and sell it for $600,000, a married couple can exclude the $500,000 worth of gain without paying any capital gains tax. If you put your children on the deed to your home and sell your home while you are alive, then that changes the tax calculations. Your children are not entitled to an exclusion if the home is not their primary residence among other requirements.
Therefore, to the extent that they have an interest in the home, they would owe capital gains tax. You have now created a tax liability that didn’t exist previously.
The same goes for a single individual. If you are single, a widow, or a widower and you put your children on the deed, you are entitled to a $250,000 exclusion from capital gains tax. Again, the same thinking applies. If your children are on the deed with you, rather than potentially having a capital gains tax-free sale, you can unknowingly create a tax liability that didn’t exist before.
Under current tax laws, if you die owning your home, with proper estate planning your children or heirs can receive a “step up” in tax basis to the value at the date of your passing and there may not be any capital gains tax owed. This can save your heirs tens or hundreds of thousands of dollars in taxes.
There are no absolutes in the legal world, so I wouldn’t say that you should never put your children on the deed to your house. However, the pitfalls that I already mentioned should be considered first.
Transferring your family homes to a trust can accomplish the same estate planning goals that would be addressed by creating a life estate and transferring the deed to your children without the drawbacks.
Please contact us for a free consultation to discuss your estate planning goals, so that we can craft a plan that addresses your goals and needs.
Leonick Law, P.L.L.C.
Attorneys and Counselors at Law
6143 Jericho Tpke., Suite 202
Commack, New York 11725
E-mail: [email protected]