Elder Law covers a range of issues facing Seniors and their families, including Medical Assistance eligibility, Guardianships, and Filial Support.
Should I Give my Home to My Children
I am often asked whether an elderly parent should transfer their home to their children. The most common goals stated are: (1) to avoid taxes, (2) to avoid probate, and (3) to protect the property from a nursing home or governmental recovery program. Transferring your home to your children may achieve these results. However, it may also result in several unintended and negative consequences. With proper planning from an Estate and Elder Law attorney, it may be possible to achieve your goals while avoiding these accidental drawbacks. These unintended and negative consequences are discussed below.
(1) Loss of Control of Property
By transferring your home to your children, you will be losing control over your most valuable asset. For most people, their home represents their life’s work. The security it represents was built over several decades of mortgage payments, real estate taxes, maintenance, and upkeep. Once you transfer your home, your children will own it, not you. The security you spent a lifetime building will be lost and will become subject to events that may be out of your control. Even ignoring the possibility of a falling out between you and your child (which does occasionally happen), your home may become subject to risks that may cause it to be lost.
In the event that your child passes away before you, runs into financial difficulty, or faces marital troubles, your home may be pulled out from under you.
(2) Increased Taxes
My clients are often surprised to hear that giving their home to their children may actually result in a larger tax bill. This larger tax bill comes from the IRS in the form of capital gains tax, not the Pennsylvania inheritance tax they were trying to avoid. To understand why your children may face an increased tax bill, you must first understand inheritance tax and capital gains tax.
If your children inherit your home worth $120,000, they will pay Pennsylvania inheritance tax at a rate of 4.5% for a total tax obligation of $5,400.
If you give your home to your children, they will have to pay a tax on the difference between the sales price of the home, and your “cost basis” (the amount you purchased the home for plus any additions or improvements you made over the years). Thus, if you bought your home in the 1950s for $12,000, and can prove additional improvements in the amount of $10,000, your will have a cost basis of $22,000. When your children sell the home for $120,000, their gain will be $98,000 ($120,000 sales price minus $22,000 cost basis). On this gain, they will have to pay 15% for Federal capital gains tax, and 3.1% for Pennsylvania capital gains tax, resulting in a total tax bill of $17,738!
If your children inherit your home through your death, they will receive a “stepped up” cost basis for the home. This “stepped up” cost basis will be equal to the date of death value of the home. In effect, this “stepped up” cost basis forgives the appreciation of the home’s value during your lifetime, and will result in minimal capital gains tax (if any) for your children.
(3) Ineligibility for Medical Assistance
Parents fearing the costs of long-term care may transfer their home to their children in order to prevent it from being sold by the nursing home, or subject to recovery under the Medicaid Estate Recovery law. However, such plans may backfire.
If you give your home to your children and then apply for Medical Assistance within the next 60 months, the transfer may make you ineligible for benefits. Because the value of your home is likely significant, your period of ineligibility will be long. To determine the length of your penalty period, you must divide the value of your gifted property by the current Pennsylvania transfer penalty divisor (for 2016, $302.42 per day). Thus, if you gave away your home valued at $120,000, you will face a penalty period of 396 days. During this time, you or your children may have to pay out-of-pocket to ensure you receive the level of care you need. Further, the nursing home may sue your children under Pennsylvania’s filial support laws to pay for your care.
Thus, transferring your home to your children without first consulting with an Elder law attorney could be a terrible mistake for you and your family.
On the surface, transferring the home appears to be a simple enough solution to one or more of your concerns. However, appearances are often deceiving. Determining whether an outright transfer to the children is appropriate involves many considerations. There is no simple answer. Each scenario is one of a kind and what works for one family may not be appropriate for another. Your family is unique, and it deserves the benefit of a thorough review before any actions are taken.
If you are like most people, your home is your most valuable financial asset. But beyond its monetary worth, your home is also where your children were raised, and it is where you and your spouse built a life together. To you, your home is irreplaceable.
In the articles that follow, I will be discussing the most common strategies that you may be able to use to minimize taxes, avoid probate, and protect your home. These strategies are:
(1) a Transfer with a Retained Life Estate;
(2) the creation of a Home Protection Trust; and
(3) the use of Exempt Transfers
Michael J. Girardi
Estate Administration is a process that involves a wide range of duties on behalf of the Executor or Administrator. These responsibilities include collecting, valuing, and protecting the estate’s assets, making payments to creditors and receiving collections from debtors, the payment of various taxes, and the distribution of the assets to the heirs and beneficiaries of the estate.
To learn more about Estate Administration, check out the resources below, or contact us to schedule a free consultation.