Should I Transfer My House into a Child’s Name?
The decision to transfer your home to your children is a complex one. It should only be made after consultation with an attorney. Following are several points to consider:
Personal considerations are by far the most important factors in deciding whether transferring your home is in your best interest. In most cases, your home is your most valuable asset. It also is your shelter. Once it is gifted to your children, it is no longer your property. It is their property. You do not get it back unless they decide to give it back to you. Rarely does a child gift property back to a parent. In addition, if your child dies before you, the home passes under his or her Will to his or her beneficiaries. Consequently, you should understand that it will probably pass onto his or her spouse and/or children. Also, if any of your children are married and later become divorced, the home will become a part of the divorce proceedings. This means that an ex-spouse of a child will have rights to the home superior to your rights. Lastly, if a child or the child’s spouse becomes bankrupt, creditors could force the sale of the home to pay off the debts.
As far as personal considerations, it is my opinion that the risks involved are too great to justify a transfer to children in most cases.
Despite the risks discussed above, many clients still pursue the issue of transferring their home to their children in order to avoid death taxes. The question arises as to what do we mean by “death taxes.” For federal purposes, a husband and wife with an estate under 10.8 million dollars in 2017 incurs no federal estate tax. However, under Pennsylvania law, there is a 4.5% Inheritance Tax on assets passing to your children.
In my opinion, the amount of tax involved is insignificant to justify a transfer to your children in most cases.
Capital Gain Tax
If the home you transfer does not become the permanent residence of your child, there will be a capital gain tax due when the home is ultimately sold. The amount will be the difference between what you paid for the home (i.e. cost basis) and the sales price. Capital gain tax on property held more than one year ranges from 10% to 15% depending on the individual’s income tax bracket. In most cases, the capital gain tax exceeds the Pennsylvania Inheritance Tax previously discussed.
Many clients realize that a lengthy illness resulting in placement in a skilled nursing home can be financially devastating. The federal and state government, through Medical Assistance, will pay the skilled nursing home expenses for the “needy”. Persons who own property in excess of $2,400, not counting excluded resources such as one’s personal residence, automobile, household furnishings, do not qualify for medical assistance. The details of the Medical Assistance program is not the purpose of this blog. However, if one applies for Medical Assistance, the government will “look back” for transfers made within five years without fair consideration. A transfer of a home to a child for one dollar would be an example of a transfer without fair consideration and make one ineligible for Medical Assistance.
In conclusion, only in rare cases should your home be transferred to your children. In most cases it is not in your best interest from a Personal, Tax or Medical Assistance standpoint. It is better to transfer other assets (i.e. preferably cash from your bank accounts and/or certificates of deposit) to your children to the extent you can afford to do so. Contact an experienced estate planning attorney to discuss your options.
Attorney Jim Ritter has been counseling local families on estate planning and estate administration matters for several decades.