"Should I give my home to my
children," is a
question that troubles many aging parents.
While the answer varies depending upon your particular situation, giving
your house to your children during your lifetime may be poor planning. This article discusses some factors you may
wish to consider before making such a gift.
People express many reasons for
putting their homes in their children's names.
Among them are the desires to save on death taxes, to avoid probate, and
to protect the home from nursing home costs.
The transfer of a home from parents to children may result in a savings of
death taxes. It may also avoid probate
costs if the children do not predecease the parents. Unfortunately, however, the transfer of a
home may have several negative consequences that are often overlooked. For example, such a transfer may actually expose
more of your assets to nursing home costs, and may burden your children with
unnecessary income taxes.
The home and related real estate of a
nursing home resident are normally protected assets. When you are no longer able to pay privately
for needed nursing home care, Pennsylvania's Medical Assistance program will
usually help pay for your care. A
nursing home resident merely needs to follow some simple requirements of
Medical Assistance to make a home an "unavailable" resource, which is
protected from nursing home costs.
It is important for you to understand
that your home does not need to be sold to pay for the costs of nursing home
care as long as either you or your spouse considers it your permanent
residence. Pennsylvania does not
place liens against the home of a nursing home resident who is receiving
Medical Assistance. Furthermore, any
nursing home that participates in the Medical Assistance program (most do) cannot
force a resident who runs out of money to turn the home over to the nursing
home or sell it.
A problem does exist due to the
Medicaid Estate Recovery law. Because of
this law, the state may someday try to recover from your estate for amounts
the government contributed toward the cost of your nursing home care. But with careful planning, based upon sound
professional advice, you can avoid having the state recover from your heirs
after your death. Making a gift of your
home to your children is usually not necessary to protect the home from nursing
home costs and cost-recoveries.
In fact, giving away your home can
actually prevent you from receiving government assistance with nursing
home costs. If you give your home to
your children and apply for Medical Assistance within 60 months of the gift,
the transfer of this otherwise protected asset can make you ineligible for
Medical Assistance. Since the value of a
home is usually significant, the ineligibility period may be long. So, transferring your home to your children
may be a terrible mistake if you are likely to need nursing home care in the
near future.
If your home has appreciated
significantly in value, its transfer to your children can also carry with it an
income tax time bomb. If a child
inherits the home through the death of a parent, the child gets a "stepped
up" tax basis in the home. In
effect, the capital gains tax on the appreciation of the home's value during
the parent's ownership is forgiven for purposes of income taxation. However, if the child received the home as a
lifetime gift from the parent, the child gets no step up in tax basis. When the child sells the home, the child will
pay capital gains income taxes on the appreciation in value that occurred
during the parent's ownership. This may
amount to many thousands of dollars in income taxes that would be avoided if
the gift was not made until death.
Furthermore, the gift of your home
during your lifetime may result in other negative tax consequences. For example, the capital gains exclusion that
is available to people who sell the homes which they own and in which they
reside may be lost.
It is also important to recognize that you
lose control over a most valuable possession by giving your home to your
children. Your home becomes subject to
the creditors of your children. It will
be included, and taxed, in the child's estate if your child predeceases you. The home can be lost in
the event the child dies, or runs into financial or marital difficulty.
Parents and children are usually
unaware of the disadvantages of a gift of the home. They often decide not to make such a transfer
when the consequences are explained to them.
Unfortunately, many such transfers are made without adequate legal and
tax advice.
Gifts or other transfers of
the home can make sense in some situations.
However, you should not give your home away without full consideration
of all of the advantages and disadvantages of such a transaction.
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