"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.