Thinking of transferring your home to your children? Is this a smart move that can help provide for them and minimize tax liability?
Why are You Transferring Your Home?
The desire to transfer your home to your children to ensure that they are provided for later, or so that the home remains in the family, is completely understandable. Unfortunately, there are many misconceptions that lead parents to make the wrong moves, which may have disastrous consequences for all involved later on. For those asking the question, “How can I transfer my house to my child?” in order to escape legal action and losing their homes or equity, the bottom line is that this is a futile route, akin to jumping out of a plane without a parachute. Any transfers done specifically to hide assets from creditors or a vindictive ex often offer no protection in court.
Sadly, most homeowners wait too long to begin estate planning and rush into the wrong decisions. So what are your options for transferring real estate to your kids and what do you need to watch out for?
How Can I Transfer My House to My Child?
1. Sell Your Home & Gift the Cash
If you are simply worried about providing for your children financially after you are gone, you could simply sell your home and gift them the proceeds. This will enable you to take advantage of tax exclusions for capital gains. This currently applies to the first $250,000 on the sale of your primary residence or $500,000 for married couples – provided you owned and lived in the house two out of the last five years. This may be fine if you don’t want to live in the home anymore, though it can affect your eligibility for receiving government assistance.
According to Grant M. Yochim, an attorney with the Steadman Law Office in Pennsylvania, overlooking the need to fund long-term care, including nursing home care, and the effect that a large transfer of assets to family can have on your eligibility for Medicaid benefits are among the biggest mistakes people make today. Here’s why:
The cost of long-term custodial care – everything from adult day care centers to skilled nursing facilities – can be crippling. A semi-private room in a nursing home now runs over $200 per day, according to the 2012 Genworth Cost of Care study. And assisted living facilities average more than $3,000 per month. That’s enough to overwhelm a retirement pension, and leave nothing for a spouse to live on. What’s more, Medicare has limits as to how much of these costs are covered.
Further, state governments impose strict eligibility requirements on your ability to qualify for Medicaid. Specifics vary by state, but generally, you must have a poverty-level income or less, and have less than $1,700 to $2,000 in total assets, before you can qualify for Medicaid.
It won’t do to transfer your home to meet the asset requirements. Under the terms of the Deficit Reduction Act of 2006, Medicaid officials can look back up to five years and disallow gifts and other asset transfers for the purposes of determining Medicaid eligibility.
Meanwhile, though, states generally exempt some amount of home equity from the eligibility requirement along with a few other basic assets, like a funeral plot, a burial plan, a limited amount of assets for the “community spouse,” or a spouse not requiring long-term care to live on.
By transferring your home, you may be transferring an asset that may be exempt anyway. And if you do it within five years of needing benefits, you may disqualify yourself from receiving Medicaid benefits.
One possible solution: If your state has a “long-term care partnership program,” you could buy a qualifying long-term care policy. These long-term care partnerships allow you to qualify for benefits under Medicaid once your long-term care insurance policy benefits are exhausted, while allowing you to keep assets equal in value to the total benefits paid under your LTC policy. For example, if you have a $400,000 home, you can buy a long-term care policy that provides up to $100,000 in benefits per year for four years. This policy will allow your family to keep the home, if your state has a long-term care partnership program.
2. Gifting Real Estate to Your Children
Clearly selling your home outright to your children can be incredibly expensive and result in many fees and taxes. However, trying to gift your house to your kids by adding them to the title can present a number of challenges too. For a start, any transfer of ownership technically means that transfer taxes are due, even if no cash is changing hands. Gifting the home to your children may trigger the gift tax. Many homeowners mistakenly believe that adding their children on title as joint tenants can help avoid taxes.
However, depending on where you live, there can still be inheritance tax due on the percentage of the property being transferred to your children after you pass on. If you have a mortgage on the property, gifting your home will also technically trigger the “due on sale” clause, bringing your entire loan balance due immediately. Check if your home loan is assumable so that you can avoid this.
3. Let Your Child Inherit the Home
Attorneys and financial planners often do a great job of scaring individuals about the faults in the system that can sometimes wind up in probate issues and result in your estate not being distributed the way you hope. However, it is true that with a solid will and some expert estate planning help one of the best options from a tax perspective is just to allow your child to inherit the property after you die. Some states have a minimal inheritance tax rate for property passed to children, like PA’s 4.5 percent. In other states no estate tax is due unless the inheritance is valued well in the millions of dollars range.
If you go this route, be aware of federal estate tax rules. Generally, your estate will be assessed a tax of 35 percent of everything over 5 million dollars. If one or both spouses are foreign nationals, a lower exemption will apply. If you are married, the surviving spouse receives an unlimited marital exemption; the estate will be taxed upon the death of the second spouse. This could require some planning to ensure that there is enough cash liquidity in the estate to pay the estate tax to avoid having to sell the home to raise the cash. Life insurance is one cost-effective traditional solution to this problem, though there are other options as well, such as the use of trusts. Note that only irrevocable trusts allow those assets to avoid the estate tax. But you also give up control with an irrevocable trust, so there are downsides (see below for more on the use of trusts).
What Dangers do I Face if Transferring My House to My Child Now?
In an interview with William J. Purdy, III of the Law Offices of Simmons & Purdy in California, Bill said “Transferring one’s home to one’s children has to rank right up there with some of the worst ideas ever conceived by modern homo sapiens since the dawn of our species.” Bill conducts a variety of tax and property classes for the firm and a Lincoln Law School. In his 20 years of experience, he says he has seen many horrendous outcomes stemming from parents transferring real estate to their children. He specifically points out issues that can jeopardize the property as well as some outlandish actions by mischievous children.
For a start, once transferred or added to the property, any actions by the children can put the asset at risk. Debts they take on, divorces and auto accidents can all result in judgements against the home. In some cases children encumber the property with mortgages, strip the equity and let it go into default. To their horror the children they transferred to have even evicted some parents from their own homes!
How Can I Safely Transfer My House to My Child?
Still asking, “How can I transfer my house to my child?” Bill Purdy suggests, “Run … don’t walk from any financial planner or attorney who suggest this.” And to “Please, please use a revocable estate planning trust to get the home to the children after both parents are deceased.” A revocable trust will at least allow you to take back control of your home and guarantee a roof over your head in case your cute kid turns into a wild child.
It is never too early to begin estate planning. In fact, having a plan before you even purchase a home in the first place is wise. However, no matter where you are at now, just make sure you interview several real estate and tax professionals before making a decision. Sleeping in tents may seem like a cool idea for a family vacation, or even a protest, but perhaps not so fun if it is because your heirs blew their inheritance early or kicked you out in the street.
hello, my parents transferred ownership of their farms to me and my brother by deed of conveyance, they both have passed away and now we want to split the property. the deed is made to me, my heirs and assigns and him and his heirs and assigns. My question is do our spouses have to be on the new deed and do they have to sign this deed when transferred since it is in our name only.
My mother has been reveiving dialysis since 2006 and in 2008 begin to receive SSD in 2013 she was placed in a skilled nursing home for 3/4 months. I have been taking care of her since 2009 & we just recently moved her back into her home a year ago along with my family (which we pay the mortgage). Since she receives MEDICAID will that effect me if she passes since she willed the house to me & can they make claim to the property? Also, once the mortgage is paid;
would it be wise to transfer the deed into my name or should she add me to the loan now?
My father helped me get the house by putting the finances in his name. How do I make sure that I don’t lose the house once he has passed. All money put into the house from the beginning I paid. He’s never put one penny into this house he only financed it with his credit.
By one penny, I assume you mean you put up the down payment, paid all the fees, make all the finance payments, and pay all the taxes and insurance every year on the home. The reality is you have been gifting your father with these payments. He may already have tax consequences of those gifts, the IRS may already want to know where he got the money to make the payments, especially if he was taking the interest and tax payments off his federal and state taxes as a deduction. If you took the taxes and payments off your taxes, you could well be liable for past taxes already.
But as to ownership, there are various ways to entail the property. First, simply have your father put the property in his will turning it over to you – this is the simplest way. Or you could ask your father to put the property into an irrevocable trust, with you being the sole beneficiary of that trust. You could also just ask him to sell you the property for the current amount you have already gifted to him plus any existing mortgage (so he gets his name off the mortgage – you assume the mortgage or refinance).
Other issues to consider, is there any sort of documentation of this agreement – did your father actually agree to turn the property over to you? Even if this is not documented was there an oral agreement that someone witnessed? If there is some sort of agreement it may be enforceable.
Will you be able to take over any existing mortgage? – why did you use your father’s credit to begin with, if you could not get a mortgage before will you be able to take over the mortgage now. This is important because the mortgage holder could block you from taking ownership and simple attempt to seize the property deciding the transfer to you represented a breach of the mortgage, or simply refuse to extend the mortgage to you making the mortgage due immediately – again likely leading to default or forcing you to refinance with another lender.
There are ways to try enforce the agreement if there is no actual oral or written agreement – adverse possession (since you have been paying the mortgage and taxes and your father passes away without leaving you the property – or tries to leave it to someone else, you could try claiming adverse possession ( I assume you are actually living in the property) – you would have to get an attorney in your area to advise you about this based on the adverse possession rules in your state. You could try bringing a suit for some sort of Equitable Remedy – in other words get a judicial decision that you were giving your father the money with an expectation of it being returned in the form of the house – probably based on equitable restitution – the court at most would provide for restitution of that amount you had invested, if there is equity in the property beyond the mortgage and the value of your payments the court would likely leave those in your father’s possession. Only an attorney in your state can tell you if this would work or even be feasible.
I own a home that I am currently renting to my son. If I put the property in his name and he refinances to pay me some of the equity, what is the tax consequences?
Hi. I paid the asking prepayment for a condominium in Vancouver/BC on 2006 when the building was in the construction course.When the building was finished on 2008, I changed the tittle to my daughter’s name and borrowed money from the bank for paying the prepayment that was asked for receiving the mortgage from the bank. My daughter does not work so she belong to my house hold and lives with me. She rented the condominium. but the rent is just almost enough for paying the mortgage, condominium fee, insurance and tax. I have been taking care of that condominium’s issues from the first beginning day.
I found out that ,that building’s council president who has a business and his business have been taking advantage of that building for years and also the vice president who some how is protecting the building’s developer regarding to unfixed deficiencies under the 5 years warranty. do not want to disclose a lot of unclear issues related to building. I have an unlimited general power of attorney registered in BC and my daughter the owner of the condominium including myself have been asking those two council presidents for answering to our questions related to a number of building issues specially those which were involved to building’s expenditures, but we did not receive clear answers to our questions .
Those two presidents along with the property manager who enjoys the support of those council presidents try to fooling us with their unclear answers. My daughter is not in position for nominating and standing for council and I can’t nominate myself for that position either, since I was tolled. my name wasn’t on the condominium’s tittle. It seems the only way that is left for us, is adding my name to the condominium tittle in order to be eligible for standing for the next AGM. based on strata act when I get the council member, so I would be entitled for finding answer to my questions based on building’s files. I asked the lawyers of justanswer.com. (2)BC probono association and (3) lawyer referral association. What would be my other option other than adding my name to tittle. They advised me: There were two ways (A) contact the unit owners and ask them for their support ,if there would 20% supporters than ask the council for a special meeting at which you could ask for answer to your questions. (how I am suppose to get the building owner’s mailing address or contact Nos. for collecting 20% supporters (B) hire a lawyer: (From the rent that my daughter collect/month nothing left for paying the expenditures for the lawyer and the superior court). I tried to express the concern of might thousand of condominium’s owners including my daughter’s concern in North of America who suspicious about their building council expending or making decisions in the wired and unclear ways.If the owners ask the council for disclosing the facts and they would not answer or answering with not clear reasons. so they have no other choice beside hiring a lawyer or shutting their mouth and letting the council with help the property manager do what ever they want to do without having any other alternative.
please let me know do I have to (1) add my name to tittle (2)shut the moth and let the council do what they want to do?
Not quite sure what your problem is. Your daughter has any and all rights of a condo homeowner – meaning she can run for the board or as a person with an interest in the Condo bring suit against the Condo Association to enforce the rules requiring upkeep or fixing problems or terms of a guarantee. You of course have no rights and unless you buy the condo from your daughter will have no standing, unless she gives you a power of attorney to represent her (if she is truly incompetent than she cannot issue a POA so not knowing your actual position it is hard to say if a POA would accomplish anything) – this might be limited. But in any case you will still only have the rights associated with being a single condo owner in the Association. You are right this sort of thing can get expensive – and you almost have to hire an attorney experienced with HOA laws in your state, and they will likely be representing your daughter.
But it is not that difficult to get an HOA to follow the actual rules set out in the HOA incorporation documents. I suspect you are asking for something you want them to do, but they are not contractually obligated to do. In this case you are asking the HOA to provide some service or repair not within the original deed or HOA contract. You will have to get the members of the HOA to agree to support this sort of request, because you are likely asking them to spend HOA funds – they may or may not agree with you as to whether they want to spend those funds in this manner – in which case you have virtually no legal basis for a complaint.
My grandmother owns a home outright and is in her estate. The estate will be shared by her serving brothers one being my dad: we went to closing and have a recorded note and deed on the property.
After my grandmother passes and my dad and uncle own the note- can they call the note due? My understanding is that they can sell the note but my contract and name on the deed will protect me. I have been looking into bank loans as I have been concerned of the outcome.
Eight years ago my parents bought a home in a retirement community in Virginia. They put my name on the deed with their own names. My mother is now in the nursing home and my 93 old dad lives at home. We are working with Social Service to place her on Medicade. We are caring for my dad at home with the hope of keeping him there. At his passing, the house was supposed to be mine. That was the purpose in the beginning