Putting the parents’ house in the children’s name is typically not a good idea. Usually, parents wish to transfer the title to their house to their children’s name because of: (a) tax reasons; (b) protection from lawsuits; (c) protection from Medicaid estate recovery; and (d) probate avoidance. If above are any of your reasons for putting the parents’ house in the children’s name, there are better ways of achieving these objectives.
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Disadvantages of putting assets in children’s names
Once you put your house in the name of your children, you completely lose ownership over it.
- Your children can sell it without your consent
- If you have a falling out with your child, your child can kick you out of the house
- If the child has debt or financial problems or is divorced, creditors or ex-spouses can take the house
Putting house in children’s name due to tax reasons
There is a mistaken concept that a parent transferring the house to the child’s name will lower taxes. First, we have to determine what kind of taxes are you trying to lower. If you’re trying to lower estate taxes, the 2022 estate tax exemption on the federal level is $12.06 million and on the state level (New York) is is $6.11 million. If your assets are lower than this, you don’t even have to worry about federal estate tax.
For capital gains tax, it’s actually less advisable to put the house in the children’s name.
When you deed your house to your child for no consideration, your child gets your tax basis. For example, if you bought the house in 1990 for $100,000 and you deed the house to your child in 2022 with no consideration, when the child sells the house for market value, for example at $250,000, your child has to pay capital gains tax based on its gain of $150,000 computed at $250,000 (the sale price) less the price you purchased it for, which is $100,000.
If the child, on the other hand, inherits the house from your when you die, the child enjoys a stepped-up basis. In the same example, if you bought the house in 1990 for $100,000, and you die in 2022 with the house having a market value of $250,000, when your child inherits the property, the child’s tax basis is stepped up to $250,000. When the child sells the house for $250,000, the child does not have to pay any capital gains tax because no gain is realized from his stepped-up tax basis of $250,000.
Putting house in children’s name for protection from lawsuits
Most professionals, especially doctors, would transfer their assets to their children to protect those assets from lawsuits, such as medical malpractice claims. However, transferring property to your children does not protect it from lawsuits filed against your children for debt or divorce. When your children dies, it goes to the heirs of the children and there is no way for you to get your property back. An irrevocable trust is the most effective and efficient way to transfer property to your children, protecting your assets from lawsuits instituted against you and your children.
Putting house in children’s name for protection from Medicaid estate recovery
Having a house does not make one ineligible from Medicaid since your primary home is an exempt asset that is not included in the computation of Medicaid eligibility. However, even if your house is an exempt asset for purposes of eligibility, it is not exempt for purposes of Medicaid recovery.
In order to protect the house from Medicaid recovery, some parents transfer their house to their children. However, the parent relinquishes all rights and loses total control over the property with an outright transfer to the children. A Medicaid trust is the most-often used mechanism to exempt a house from the Medicaid estate recovery program. When the transfer to the Medicaid trust is done prior to the lookback rule (usually 60 months for most states), the house is exempt from the Medicaid estate recovery program.
Putting house in children’s name for probate avoidance
Some parents deed the house to their children in order to avoid probate. Many believe that probate is time-consuming and expensive because it has to go through a court process. Although this may be true, deeding the house to the children is not the appropriate legal mechanism to avoid probate because the parent completely relinquishes control over the property. The parent faces many risks when he loses title over the house. For this reason, many estate planning lawyers use a revocable trust for property to avoid probate.
The best reason to put the house in your children’s name
Deeding the house to your children does not appear to be the most effective way to achieve any of the above objectives. However, if you would like to give a house to your child because you have several houses and you would like your children to enjoy a bit of their inheritance while you are still alive, then deeding the house to your children’s name is a good idea.
If you are planning your estate and are considering putting the house in your children’s name due to Medicaid, lawsuit protection, or probate avoidance, consult with an estates attorney to know your options. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We are located in New York, NY. You can call us at 212-233-1233 or send us an email at [email protected].