Hi ,

Parents sometimes transfer title on their house to their children in an attempt to avoid probate or to keep the home from being lost to pay for nursing home care. Is that a good idea?

As a general rule, the answer is NO. Transferring your house to your kids while you’re alive may avoid probate (the court process that otherwise follows death). But gifting a home also can result in a big, unnecessary tax bill and put your house at risk if your kids get sued or file for bankruptcy. You also could be making a big mistake if you hope it will help keep the house from being consumed by nursing home bills.

The Tax Consequences: Why You Shouldn’t Gift the House.

If you gift your house to your kids, they take your cost basis. In other words, if you paid $75,000 for your house many years ago and then gift it to your kids, they take your tax basis. If the house is then worth $275,000, they will pay tax on the $200,000 gain. However, if you bequeath the house to your kids at your death, they get what’s known as a “step-up in tax basis.” They receive a tax basis of $275,000. They can then sell the house tax free.

What About Medicaid Planning?

Most houses are considered exempt assets for purposes of determining Medicaid eligibility. They simply don’t count. Not knowing this, some people transfer a home to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the indigent. But gifts or transfers made within five years of applying for Medicaid can lead to a penalty period, when seniors are disqualified from receiving benefits.

Other Issues to Consider:

Transferring your home to someone else also can expose you to their financial problems. Their creditors could file liens on your home and, depending on state law, get some or most of its value. In a divorce, the house could become an asset that must be divided.

There Are Better Ways to Transfer A House
One way to avoid probate is to convey your homestead property by using a “life estate deed” (also called a “lady bird deed”). This type of deed gives you complete control over the homestead property, including the right to sell, mortgage or even change your mind about the transfer. It also allows your homestead to be automatically transferred to your kids when you die, without the need to go through probate.

Your kids have no rights to the property while you are alive. You don’t need their consent to sell or otherwise deal with the property. You also don’t need to worry about their creditors or claims arising from their divorce. In addition signing and recording a lady bird deed does not affect your homestead property tax exemption.

You should contact us for more information if this sounds like something you might be interested in. For an interesting article on this topic, see:

If you would like more information about setting up an estate plan, or updating an existing estate plan, please give us a call, send an email, or use the convenient “Request a Consultation” button on our website, https://www.kaneandkoltun.com.