We keep you up-to-date on the latest tax changes and news in the industry.
This article is adapted from Stephen F. Sutton, partner, Kahan Kerensky Capossela, LLP.
We get this question a couple a times a year.
While a home ownership transfer can be an effective transaction in some cases, it may not be the best idea. Various factors need to be evaluated before making such a transfer.
First, the individual’s health, finances, and family dynamics must be taken into account. Questions such as the essentiality of the home, the children’s financial stability, and the impact on the parent’s future use of the property must be addressed. It’s essential to examine the client’s financial situation and family circumstances thoroughly.
The goals and reasons for the transfer are also crucial. Some common reasons include avoiding probate and protecting the house from nursing home costs. However, various legal aspects, such as probate administration, long-term care planning, taxes, asset preservation, and liability concerns, must be considered before deciding on the transfer.
The timing and type of transfer are also significant. There are different options, including outright deeds and deeds with retained life use. Each type of transfer can affect the answers to the topical questions previously mentioned.
Transferring the house through a deed creates joint ownership, and the surviving co-owner will own the entire property upon the parent’s death. This means the Last Will and Testament may become irrelevant, and if multiple children are to share the property’s value, they must be named on the deed. However, some exceptions exist for transfers to specific individuals, like spouses or disabled children, regarding Medicaid eligibility and potential penalties.
Regarding income taxes, selling the house after transferring it to the children might result in taxable income for them. A properly drafted deed with a retained life use can help minimize income tax effects. For estate tax purposes, the high exemption amounts may allow for tax-free transfers, but a gift tax return may still need to be filed if the value of the gift exceeds $17,000.
Once the children become legal owners, they have control over the property. They can charge rent, sell the house, or use it to pay their creditors. This can have implications for the parent’s future housing and financial security.
In conclusion, transferring a home to one’s children involves various complex legal and financial considerations. Seeking advice from a knowledgeable attorney is crucial to fully understand the implications and make an informed decision based on individual circumstances.
Sign up for our newsletter.