On behalf of Sayer Regan & Thayer of Sayer Regan & Thayer, LLP posted on Tuesday, November 22, 2022.
This is a question that many elder law and estate planning attorneys often hear. When people get older, they may start feeling pressure to protect the assets they have worked their whole life to obtain. One solution is to transfer assets to their children, to prevent the state from taking their money for long-term care or for taxes.
While there is some truth to this line of thinking, it’s not always wise to directly transfer assets to your kids. Your first step is to get advice from an attorney that deals with these issues every day.
Avoiding Estate Tax or “Death” Tax
In many states there is a so-called death tax that taxes you on your assets when you die. The limits vary by state. The estate tax threshold for Rhode Island is $1,648,611. If your estate is worth less than that, you owe nothing to the state of Rhode Island. In Massachusetts that threshold is $1 million. So, if you die with more than $1 million in assets, you – or more accurately, your beneficiaries – will have to file and pay estate tax on that. If, however, your estate is worth less than $1 million, there is no need to file an estate tax and therefore no need to pay anything.
Understandably, many seniors don’t want their beneficiaries to owe such a “death” tax, and so they explore the option of giving away their assets before they die. Rhode Island, as an example, does not have a gift tax. However, the federal gift tax has an exemption of $16,000 per person per year as of 2022.
There are many reasons why you may want to think twice before transferring ownership of your home to your children.
Eligibility For Medicaid
In light of the high cost of long-term care, many seniors are worried about how they will pay for long stays in a nursing home or assisted living facility. Even for wealthy families, these expenses can be devastating and quickly drain savings that have been built up over decades.
Private health insurance and Medicare won’t pay for long-term care, but Medicaid will. The caveat to that is that you have to drain just about all of your savings before they will pay a penny towards your care.
This is why many seniors transfer their homes to their adult children, with the goal of avoiding selling the home so they can qualify for Medicaid. Truth is, this could actually delay (or disqualify) your Medicaid eligibility. That’s because the federal government has made strict provisions over recent years to reduce Medicaid abuse, including a provision for a five-year “look-back” period. Basically, before you can become eligible for Medicaid, your finances must be reviewed to spot any “uncompensated transfers” of assets within the preceding five years. If and when these transfers are detected, you may be subject to a penalty period that delays your eligibility.
So, if you were to transfer your house to your children now but then end up requiring long-term care within the next five years, this action could greatly delay your eligibility for Medicaid benefits.
Potential Tax Liability For Children
Another drawback to is the potential tax liability for your children. The value of your home, assuming you have owned it for many years or decades, has likely increased a lot since you first bought it. You may assume that by transferring your home to your kids, they could sell it when you die and make a fortune. You may also think you’re saving your kids from having to go through a lengthy probate process.
While probate can certainly be a long and costly process, the money spent on that could be a drop in the bucket compared with the tax bill your kids would face.
Why? Well, if you were to transfer your home to your children while you’re alive, they will have to pay capital gains on the difference between the home’s value when it was first purchased and the price they end up selling it for. Capital gains tax in Massachusetts is 12 percent, which as you can imagine can really add up.
Vulnerability to Debt, Divorce, Death and Disability
If you transfer your home to your kids, the property is vulnerable to many factors. If your child has accumulated a lot of debt, their creditors can make claims against the home to get back what they are owed. Your child may then have to sell the home to pay off the debts.
Or, let’s say your child goes through a nasty divorce while the house is in their name. Well, that home is now considered marital property and their spouse may be entitled to half of the value.
The disability or death of a child can also pose a difficult situation. If, due to a disability, they seek out Medicaid benefits, their eligibility can be compromised when your home is in their name. Another scenario would be if your child dies before you do, and your house is in their name, it’s considered part of their estate and will be passed onto their beneficiaries (most likely their kids or your grandchildren). In this case, you would end up with nowhere to live.
As you can see, there are many pitfalls to transferring ownership of your home to your children. It’s a decision that should not be taken lightly.
Contact Sayer, Regan & Thayer LLP for Estate Planning Help
So, should you transfer ownership of your home to your kids? We get this question all the time. It will depend on your personal wishes and the state of your finances. Because we advise clients on this issue regularly, we encourage you to contact us toll free at 866-378-5836 or 401-324-9915 for a free, no-obligation consultation from our estate planning attorneys.
These materials have been prepared by SRT for informational purposes only and are not intended and should not be construed as legal advice.