In my estate planning practice a common concern is protecting assets so that they can be passed along to their children and grandchildren. Many people are concerned about the cost of nursing home care, and with monthly costs for nursing homes of $15,000 or more, the cost of this care can quickly consume an estate.
A major asset for most people is their home and I often am asked: “Should I transfer my house to my children to “protect” it from the nursing home costs?” I always have two initial responses. The first is that under current law the transfer of your home must occur at least 5 years from the date you apply for Medicaid assistance to pay for any needed nursing home care. That is, the so-called “look back” period is 5 years. This means that any assets transferred from your estate within 5 years of applying for Medicaid will be considered to be available to pay for the costs of nursing home care.
My second response is that transferring your home to your child or children is not without risk. In addition to estate planning I also assist people with bankruptcies and if the property is in your child’s name, then the Bankruptcy Court will consider the house your child’s and would be subject to sale to pay your children’s creditors. I had a call the other day from a person who said he did not “own” his parent’s house – it was just in his name to protect it in case his parents went into a nursing home. I informed him that the Bankruptcy Court would have a different position on this.
The other major consequence of transferring your house to a child is what may happen if your married child gets a divorce. There is no clear answer to this question but it is fair to say that “your” house that is now in a child’s name may be considered a martial asset when dividing up your child’s assets with an ex-spouse.
Finally, if your children inherit your home they get a step up in basis. What this means is that if you purchased your home 25 years ago for $100,000 and today it would sell for $550,000, if you give the home to your child while you are alive they get your basis ($100,000). If your child inherits your home, their basis would be the value of the home on the date of your death – let’s say $550,000. If they sell the house for $550,000 and the basis is $550,000 the income tax to your children would be $0. In contrast, if their basis is $100,000, they would pay tax on $450,000 ($550,000 sale price minus their $100,000 basis) or approximately $90,000 in income tax when they sell your home (based on an estimated 20% capital gains tax rate).
The above short discuss illustrates that any decision to transfer your home to a child should not be taken without a review of all the potential consequences. The money you spend to seek the advice from an experienced estate planning attorney would be dwarfed by the amount that would be lost if the you transfer your house without exploring the possible risks associated with such a transfer.