One of the most common questions we get from clients is whether they should transfer their house to their children. The answer to this question is almost always absolutely not! Many people think that transferring their house to someone else will allow them to protect their home from having to be sold in the event that they need to go on Medicaid or receive VA benefits. They believe that getting the house out of their own name will help them qualify for these benefits more easily, and that such a tactic is easier and less expensive than executing and funding estate planning documents. However, there are several reasons why this is never a good idea.
Your Children May have to Pay Huge Capital Gains Tax.
If you are elderly, it is very likely that you purchased your home thirty, forty, or even fifty years ago. The price you paid for your house at that time was probably much less than its current value. For example, say that you paid $35,000 for your house, and it is now worth $250,000. If you transfer the house to your daughter and she later wants to sell the house, 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 she received it - $215,000. You can see how much this can add up!
In the alternative, if you transfer the house through a Will or a Trust, your beneficiaries will receive what is 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.
As you may know, there is a five-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 have made in the past five years will result in a "penalty period." In 2018, every $6,422.00 worth of uncompensated transfers that you made in the past five years will result in your Medicaid benefits being withheld for one month. Medicaid will not penalize applicants for transfers that occurred more than five years ago.
If you transfer your home to your children and then require long-term care within five years of the transfer, Medicaid will consider this to be in uncompensated transfer. This type of transfer has the potential to delay your Medicaid benefits and possibly even prevent you from ever qualifying for Medicaid.
Debt, Disability, Divorce, or Death
There are a few other reasons why the idea of transferring ownership of a parent's house to their children is never a good idea. If you transfer your home to your child and they have significant debts, then creditors could inquire as to the assets in their name. If your house is in their name, then creditors could make claims against that property in order to recover the debt owed to them. This could result in your child having to sell your house to satisfy his or her creditors.
Additionally, if you child becomes disabled and required Medicaid or government benefits of her own, owning your house could prevent her from qualifying for these benefits in the same way that it might prevent you from qualifying for benefits if you need long-term care.
Another potential issue is divorce. If you transfer your home to your child and then they go through a divorce, your house could be considered an asset to be divided or dealt with as part of the property agreement with their former spouse.
Finally, if your child passes away before you do and you have transferred your home to him, then your house could be considered part of his estate and distributed to his heirs instead of yours.
Obviously, none of these outcomes are ideal. If you own a home and you are looking to qualify for Medicaid, VA benefits, or other long-term care benefits, an experienced elder law attorney can work with you to implement strategies that will preserve your assets while allowing you to accomplish your goals and receive the benefits you need.