“My husband and I are in our mid-70’s and we still live in the house where we raised our children. All of my friends keep telling us we should transfer the house to the kids’ names so that the government doesn’t take it. Is this a good idea?”
The short answer is that it is probably NOT a good idea to sign your house over to your children. Why?
If you have lived in your home for a very long time, then it has likely appreciated a great deal in value. This means that upon the sale of the house, there would be a large capital gain which is subject to a capital gains tax. If you and your husband sell it during your lifetime, while it is still your primary residence, however, then you are entitled to the homeowner’s exception on a primary residence, which allows the first $500,000 (for a married couple) or $250,000 per person of gain to go tax-free. The result is that the homeowner is subject to very little or no capital gains taxes, depending on the value of the home at the time.
On top of that, if you and your husband own your home at the time of your death, then your heirs get a “step-up” in the tax basis. This means that upon the death of the second of you, the tax basis is no longer the amount you purchased the house for, but the current market value. Thus, if your home is sold soon after your passing, there will be no capital gains tax due.
What if we decide to transfer ownership?
On the other hand, if you transfer your home to your children now, then your children get what is referred to as the “carry-over basis,” which is the value of the house when you purchased it (along with what capital improvements you may have put into the home over the years). Thus, when your children sell the house, they may have to pay a very large capital gains tax since they won’t qualify for homeowner’s exception, and the house won’t be in your taxable estate so there won’t be a step up in the tax basis upon your death.
The outright transfer of the house to your children during your lifetime could result in hundreds of thousands of dollars of tax that could have been avoided.
A second reason to hold off on transferring your house to your children is that it is very important to understand how transferring assets and your home will impact your receipt of government benefits should either of you need long-term care at home, in an assisted living facility, or in a nursing home. Medicaid has very specific rules around making gifts and it could be that the transfer of the house makes you or your husband ineligible for Medicaid coverage, which could put yourselves in a very vulnerable position.
A third reason is that once you transfer your home, you lose control over what is likely one of your greatest assets. While no one likes to think their children would do anything against their own interest, an outright transfer means you no longer have a legal interest in the house. This could result in an unfortunate family dynamic.
There may be some very good reasons to consider moving assets, including your home, out of your names, including for tax purposes or long-term care planning. But you want to make that decision understanding all of the upsides and downsides so getting competent counsel is essential.
If you have questions about transferring ownership of your home or want to know more about how you can best plan for your future, please contact Partner Allison J. Busch at abusch@hdrbb.com or the HDRB&B attorney with who you normally work with.
