Transferring your home’s ownership to your adult children during your life might seem like the right choice, whether it be to qualify for Medicaid, reduce tax burden or avoid probate. However, making this change may not be as good as you think.
Here are 3 things that you should keep in mind before doing the transfer
Number 1: Big tax bill for your children
Another downside to consider before transferring ownership of your home is the impact that it may have on your adult children. Transferring titles to your children puts them at risk of tax liability. If you are elderly, you may believe transferring your property will help in several ways for you and your children, including your children have the possibility of selling your home and avoiding probate for you and your loved ones.
Nonetheless, by doing so, you may cause bigger problems for them. Probate is a court process that happens when you do not have a will or a trust. Depending on the case’s complexity, the process can be long and expensive. However, the expense of probate will most likely be minor compared to the tax bills your children can encounter.
This is because when you transfer homes to your child during your lifetime, he or she is forced to pay capital gains tax on the difference between the value of the house when purchased and the value of the home’s selling price when transferred. The tax bill can be massive, depending on the home’s value. Capital gain taxes are the only kind of tax that could play a role in the transfer of ownership of your home, which may cause a reassessment of your home and its value and increase further, depending on the county and state where the home is located.
On the bright side, by having an estate plan in place, you can better protect yourself and your family.
Number 2: If you want to be eligible for Medicaid, this can delay the process
With the skyrocketing prices for long-term care, you may be concerned about your (or your senior parents) ability to pay for lengthy stays in assisted-living facilities or nursing homes. And since neither traditional health insurance nor Medicare will pay for your long-term care, you may consider Medicaid to help cover the costs. Nonetheless, to become eligible for Medicaid, you must exhaust every penny of your savings.
This is where transferring ownership of your home to your adult child may come into play, rather than selling your home. However, this scheme is a big mistake for various reasons. Not only will it delay the process. It may even disqualify your eligibility for Medicaid. In order to better understand, it is important to bring into light the Deficit Reduction Act passed by Congress in February 2006. This act includes several provisions to reduce Medicaid abuse.
Within these provisions, there was a five-year “look-back” period for eligibility. In other words, before you qualify for Medicaid, there is a review of your finances for any “uncompensated transfers” of your assets within the five years before your application. If “uncompensated transfers” are found, it may result in a penalty period that will push back your eligibility. Any transfers made before the 5-year mark preceding the application will not play a role in the review. The penalty period is calculated by dividing the uncompensated transfer amount by the average cost of one month of private nursing home care in the state you live in.
Considering this, if you transfer your house to your children and then need long-term care within five years of ownership transfer, it may delay you tremendously and possibly disqualify you completely. Rather than taking the risk, contact us today to learn more about safer and more effective options to help you protect your future.
Number 3: Your Home Could Be Left with Debt, Divorce, Disability, and Death
There are various other reasons why transferring ownership of your home can bring you big consequences. If your child has significant debt and becomes a homeowner, creditors can make claims against the property to recoup what they’re owed, which will leave your child no other choice but to sell the home to repay. Or consider this scenario: If your child, as a new homeowner, goes through a divorce, the home can potentially be considered marital property, which may lead to your child having to sell the home or having to pay their partner a share of the value of the home.
While debt and divorce are some significant factors, think about disability and death. If the new homeowner, your child, becomes disabled and seeks Medicaid, he could encounter the previously mentioned troubles which were originally avoided. Or, in the case that your child dies before you and is already the homeowner, the property may be considered part of your child’s estate, potentially leaving you homeless.
The risks mentioned are only a few of the many possibilities that can arise, and having proper estate planning in place can help you avoid expensive problems like these.
Here at Legacy Counsel, we help you find alternative solutions to help you with your unique case. We guarantee to assist you in transferring your home and all other assets and wealth and enable you to better afford the long-term healthcare that best fits you. Schedule a Legacy Session and start taking care of yourself and your loved ones.
