I often get the question, “Should I gift my house to my children?” Many times when people reach their 70s and 80s (and sometimes even in their 60s), they want to protect what is typically their largest asset, their home. People are concerned about the cost of long term care and the possibility that the government could “take their home.” One potential way to protect the home is to gift it to the child(ren).
More often than not, I tell clients that it would be a mistake to gift a house to their children. It’s usually more complicated of an issue that anticipated, and it greatly depends on the facts of the specific situation whether the gift is a good idea; the age and health of the client, the number of children, the physical and financial health of children, the physical and financial health of the children’s spouses, the children’s ages, and many other factors all play a part in my advice to my client.
The biggest deterrent to the gift is often the loss of control a parent will have in the home. At first blush, this doesn’t seem like a big issue, but when we review different, very possible, fact scenarios a parent wants to continue to control her house. When a parent transfers real estate, it is not the parent’s asset to control any longer. If a new roof is needed, the parent can no longer mortgage the house to pay for the new roof; the child now has to get the mortgage. If the child wants to occupy a portion of the house against the parent’s will, the child has the right to do so. Most alarming of all the scenarios is if a child wants to evict the parent. The child would have the right to do this. Most of the time, a child evicting a parent sounds very far-fetched, but it is impossible to predict how a relationship can change with time.
Additionally, when children become the owners of their parents’ home, the home is vulnerable to the financial woes of the children. For example, if a child, the new owner of the home, files for bankruptcy, the home is now an asset in the bankruptcy. Also, if a child has a judgment against her, the judgment could become a lien on the home. The parent could have to leave the home merely because a child or his or her spouse is having money difficulties.
Tax consequences should always be considered when transferring assets especially real estate. When a parent gifts the homestead to her children, if the children intend to sell the property, they will likely have capital gains tax consequences upon the sale. Here is a typical example:
Sally has lived in her home for 50 years. She purchased the home for $30,000, and now the home is worth $150,000. She transfers the home to her two children. A few months later, Sally goes into a nursing home and the children sell the property.
Assuming that the children never lived in the property, they will owe capital gains tax on the difference between the sale price and the basis; in this situation, depending on the sale price and the children’s tax bracket, the children will have a large tax burden from selling the house. If Sally would have left the house to her children upon her death, the kids would have a step up in basis (meaning the basis is the same as the fair market value of the property on the date of the parent’s death), and assuming the parties sell the property before the property value changes, there would be no capital gains consequences for the children.
Divestments can also be a cause of concern for people looking to transfer their homestead. When a person transfers homestead property for less than fair market value, less than five years prior to applying for Long Term Care Medicaid, that transfer would be considered a divestment. The person applying for Medicaid would be ineligible for a period of time based on value of the divestment. Whether this is a large risk depends on the parties’ age, the parties’ health, and whether there are other assets available to pay for long term care. There is no way to guarantee that a person wouldn’t have to apply for Medicaid within five years so this is often a cause for concern, and the parent is taking some level of risk by gifting the homestead.
This article is about the reasons parents should not gift their homestead to their children. On occasion, I find a client that gifting their homestead makes perfect sense, but the purpose here is to illustrate that there are many things to consider and the decision shouldn’t be made lightly.
If you would like more information, please contact me at firstname.lastname@example.org or 920-921-6000.