As our parents age and begin to worry about losing their homes due to possible future nursing home expenses, they frequently think about deeding their homes to their adult children, feeling that this protects them. However, there are other and more effective ways to plan.
Often, the home is the most cherished and most valuable asset a senior owns. There may or may not be a mortgage against the property. Here are some factors to consider and discuss with an elder law attorney before making any transfer of the house:
1. Many homes have appreciated greatly since the owner bought them. If the seniors ever sell the house, they normally will be able to take advantage of the tax laws that allow them to shelter $250,000 of gain ($500,000 for a couple) without paying tax on the appreciation in value. On the other hand, if they give it to their children, the children will take it at the tax basis that the parent had (often the original purchase price). If the children do not reside in the house or sell it during their lifetime, they will have to pay capital gains taxes on the difference between the tax basis and the sales price. Additionally, if the children inherit it, they will take a stepped-up tax basis, so that they do not have to pay capital gains tax on the value at the time of the parents’ death.
2. If the house has a mortgage on it, the lender could call the whole loan due and payable because of the “due on sale or transfer” clause that is present in most mortgages. Additionally, depending on how things are structured, there can be issues about the tax deductibility of the mortgage interest.
3. If the adult child dies before the parent, the house would become part of the child’s estate and dealt with according to the child’s wishes.
4. If the adult child gets sued, divorces, or becomes incapacitated, there can be complications because the adult child owns the house.
5. If the adult child has children going to college who need financial aid, their ability to qualify could be affected by the parent owning the house.
6. Medicaid imposes a 5-year look-back on asset transfers prior to the application for coverage. That means gifting the asset in hopes of protecting it from nursing home costs, instead of doing careful planning, could actually result in penalties that make the overall nursing home expense higher.
7. For a couple, as long as one person lives in the house, the house is not a countable asset in determining if one of them can qualify for Medicaid for nursing home care, and by gifting it to children, they could be creating unnecessary expense and loss of control.
For some people, the best way to try to protect the home and qualify sooner for Medicaid in a nursing home is to put the home in an irrevocable trust. Another planning tool for some circumstances is a deed with a retained life estate.
Each situation is unique, and the rules are very complicated. If you or your parents are wondering what to do about a family home, consider talking with an elder law attorney before you do anything, and get help with developing a good overall plan which includes planning what to do with the house.