People tell us, “I would like to transfer my home to one of my children. They told me that transferring the house to them will save money on estate taxes, that it will help me protect the house from my second spouse and from creditors, and it will help me qualify for food stamps, SSI and Medicaid.“
No Tax Savings
Transferring a house to your children is not likely to result in any tax savings. In fact, transferring a house to your children can in some cases result in capital gains liability. This is because gifted property is taxed on the capital gains accumulated by the person gifting the property, while inherited property is not taxed on the capital gains accumulated by the person who died.
Gains from the sale of primary residence are exempt from capital gains in the amount of up to $250,000 per individual or $500,000 per couple. This is $250,000-$500,000 in GAINS. But if gains are more than that, or if the property is not a primary residence for at least two of the five years preceding the sale, then the inheritance exemption can result in substantial capital gains tax savings.
Those savings can be wiped out if you transfer your house to your children during your lifetime.
Transferring your house to your children is not likely to make a difference in your Medicaid application. As long as your house is worth under $780,000, it will be exempt from being considered an asset for purposes of qualifying for community Medicaid, including homecare.
If you are applying for institutional Medicaid, the Department of Social Services will penalize you and disqualify you for approximately a month for every $10,000 of value you’ve transferred to your children as long as the transfers occurred within five years of your application for nursing home Medicaid.
If you are doing the planning and are transferring your house to your children in view of your anticipated nursing home stay five years or more from now, then transferring the house to your children through a trust is a better option than transferring it to them outright.
Advantages of a Trust Over an Outright Transfer
When you decide to transfer your house to your child, you may be on the right track in some ways. However, a better way of transferring the house would be not outright but through a trust.
- preserve the capital gains tax “reset” that your heirs get by inheriting the property
- assures that you are allowed to stay in the house during your lifetime
- avoids the long and costly probate process
- assures that your children have immediate control over the property after your death
- makes your assets harder for creditors to locate
What a house transfer to your children will not do:
- will not qualify your for Medicaid (because most houses are exempt assets anyway, and a better alternative is available – a Medicaid Trust)
- will not help anyone save money on taxes
Food Stamps and SSI
You may be able to qualify for Food Stamps (SNAP) or SSI (Supplemental Security Income) even if you own your home, as long as it’s under the value limit.
Do You Want the House to be Yours?
I know that you love your children and trust them, but historically there have been children who have tried to evict their parents from their own home or try to convince them to leave saying that the house is no longer yours. I understand that this is unlikely to happen to you, but why take the chance and have someone else own the house that you bought and paid for? Wouldn’t it be better to achieve the same goals with a less drastic approach, and either don’t transfer the house to your children at all or do the transfer through a trust.
Your Other Children
It is possible that the “tax and security” issues your child is telling you about are just a pretense, and the real reason that the child wants you to transfer your house to them is to exclude the other children from what could have been their inheritance. Of course you do have the right to disinherit your other children. If that is your intent. But be wary of a situation where you think that you are helping your other children save money on taxes and keep more of their inheritance when what is really happening is that you are being manipulated by one or more of the children to the detriment of your other children.
Trust vs. Keeping the House in Your Name
When you keep your house in your name, you get absolute control of the house, and your children get the full reset of capital gains. However, your children will have to go through the probate process in the Surrogate’s Court after your death, and you may have the house be a countable asset for nursing home medicaid, meaning that you will have to sell the house and spend down the money before qualifying for Medicaid.
When you transfer a house into your trust, you will keep the right to live in the house and preserve the capital gains reset for your children. Your children will be spared the probate process, and you will qualify for nursing home Medicaid without having to sell your house, as long as you do the transfer to the trust within five years of applying for nursing home Medicaid.
Transferring a house to your children is not the most efficient way of dealing with tax, inheritance and Medicaid issues. There are much better solutions.
Albert Goodwin, Esq. is a New York wills, trusts and estate lawyer. He can be reached at (212) 233-1233.