Transferring the ownership of your home to your adult child might initially appear advantageous, whether for Medicaid eligibility, probate avoidance or tax reduction. However, this decision often backfires drastically, carrying considerable risks for all parties involved. Before taking the step of transferring your cherished family home, it’s crucial to understand the potential downsides:
Jeopardizing Medicaid eligibility: The soaring costs of long-term care have prompted consideration of Medicaid coverage. Some believe that transferring their house to adult children could facilitate Medicaid qualification by preserving the property. However, this strategy can lead to significant setbacks. The Deficit Reduction Act established a five-year “look-back” period, scrutinizing asset transfers before Medicaid eligibility.
Any transfers within this period may incur penalties, delaying Medicaid benefits. For instance, transferring a home worth $500,000 could delay benefits for 50 months. Such delays might hinder or even entirely disqualify you from crucial benefits. Seeking advice from legal experts can provide safer alternatives, like exploring long-term care insurance options.
Potential tax liabilities for your child: Transferring property during your lifetime could impose substantial tax liabilities on your child. Transferring the property upon your death through estate planning enables your child to benefit from a “step-up in basis,” reducing capital gains tax upon selling the property. In contrast, transferring ownership while alive forfeits this benefit, subjecting your child to substantial tax bills.
Beyond capital gains tax, there might be adverse implications for property tax basis, potentially causing reassessment for tax purposes. Utilizing estate planning tools, such as revocable living trusts, can bypass probate without exposing beneficiaries to excessive tax liabilities, ensuring a smoother asset transfer.
Vulnerability to debts, divorce, disability and death: Transferring home ownership to your child exposes it to various risks related to your child’s circumstances. If your child faces substantial debts, creditors may claim the property, compelling its sale. In the event of divorce, the home might be considered marital property, leading to its sale or division.
Moreover, having the home in your child’s name could affect their eligibility for government benefits in cases of disability. If your child dies before you and owns the house, it might pass to their heirs, potentially leaving you in a precarious housing situation.
In summary, using the transfer of home ownership as a simplified estate planning approach can have severe repercussions. Seeking guidance from experienced legal professionals specializing in estate planning ensures the protection and seamless transfer of assets, securing your family’s future without legal complications.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.
This article is provided by your local estate planning attorney, Corina Colan.
The Law Office of Corina I. Colan / (909) 265-3315 / ccolan@colanlegal.com / www.colanlegal.com
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