Should I Give My Home To My Children?

Fredericksburg Elder LawPlanning for your family’s immediate and long term future is something most parents think about. Because your home is likely the largest purchase you will make during your lifetime, deciding what to do with it is among the most important decisions you can make.  In some situations, parents desire to leave their residence to their children in advance of their death, in an effort to avoid probate issues and protect the equity in the home, but this generally is not a wise idea.

It is completely understandable to want to transfer your home to your children to ensure that they are provided for later and so that the home remains in the family. Unfortunately, there are many misconceptions that lead parents to make the wrong moves, which may have disastrous consequences in the future, such as:

1.  Debts of Children: If you transfer your residence to your children prior to your death and then any of your children are sued – such as for a past due credit card or for causing a car accident — your house may become subject to this debt. In the worst case scenario, this could result in you being forced to leave your residence so the creditor can sell the property.

2.  Actions of Children: Irresponsible children could encumber the property with mortgages, strip the equity and let it go into default. Malicious children could even evict their parents from their own homes.

3.  Future Family Discord: While you may currently have a great relationship with your children, you never know how relationships may change in the future.  In the event of future disagreement, it is likely not a good idea to rely solely on your children’s good nature to allow you to reside in “your” residence which they now own.

4.  Multiple Children: If you have multiple children, transferring the residence to just one child. may cause significant strife between the children, especially since that child will not be under any legal obligation to share the value of the residence after your death. In the event you put your residence in the name of all your children, disputes could arise about who is going to be allowed to live in the residence and who will be responsible for managing the property, paying taxes, insurance, etc.

5.  Taxes:  Giving away your home to your children can have disastrous tax consequences because when you give them your house, you also give them your tax basis for capital gains purposes.  For example, let’s assume you purchased your home in 1975 for $25,000 and made $15,000 worth of improvements over the years, and your house, at the time of your death, is worth $450,000.  Your tax basis – what you paid for the house plus improvements — is $40,000.  If you gift the house to your children while you’re alive, your children take over your tax basis of $40,000, which means if your children sell the house shortly after your death, they will pay capital gains tax on $410,000 (i.e., the difference between their tax basis and the sales price).  With today’s top federal capital gains tax rate of $23.8%, that could mean almost $100,000 in capital gains tax, not including state capital gains tax.  Alternatively, if you leave the house to your children upon your death, or protect it now by giving it to your children though a properly-drafted asset protection trust such as the Living Trust Plus™, your children will get a “step-up” in basis, meaning that their tax basis will be the value of the house upon your death.  So in the example just given, the children would pay zero capital gains tax.

6.  Medicaid Eligibility: Gifting your home to your children later in life can negatively affect your eligibility for receiving government assistance.  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.

The cost of long-term care can be crippling. Nursing homes in Northern Virginia cost $10-$12,000 a month. Assisted living facilities average more than $5,000 per month. That’s enough to overwhelm a retirement pension, and leave nothing for a spouse to live on.

State governments impose strict eligibility requirements on your ability to qualify for Medicaid. Specifics vary by state, but generally, you must have less than $2,000 in total assets before you can qualify for Medicaid. In addition, under the terms of the Deficit Reduction Act of 2006, Medicaid officials look back for five years and penalize gifts and other asset transfers for the purposes of determining Medicaid eligibility.

By transferring your home within five years of needing benefits, you may disqualify yourself from receiving Medicaid benefits.  For example, if you give your house worth $450,000 to your children, this gift will result in a 58 month penalty (period of ineligibility for Medicaid) in Fairfax, Virginia and the rest of Northern Virginia and an almost 76 month penalty in the Fredericksburg, Virginia and the Rest of the State.

If transferring your home to your children can lead to all the issues described above, what can you do?

A Revocable Living Trust (RLT) generally provides for the creator of the trust (and, if applicable, the creator’s spouse) to have full use of the trust income and principal for life. On the death of the creator, the assets may continue to be held in trust (or may be distributed) for the benefit of the named beneficiaries, such as the grantor’s children. The major benefits of the RLT are protection from probate and incapacity.

Although an RLT does a terrific job of avoiding probate, what most people don’t realize is that an RLT does not protect your assets from creditors or from the expenses of long-term care. The Living Trust PlusTM maintains much of the flexibility of a revocable living trust, but protects your assets from the expenses and difficulties of probate PLUS the expenses of long-term care while you’re alive, PLUS lawsuits and a multitude of other financial risks during your lifetime.

Almost everyone who drives has auto insurance, and almost everyone who owns a home has homeowners insurance, yet only about 10% of the population have Long-Term Care Insurance.  The other 90% are totally at risk for winding up financially destitute because of the need for nursing home care.

If you’re a client or potential client who would like more information about the Living Trust PlusTM, visit to register for one of our upcoming Living Trust PlusTM informational seminars in Fairfax on October 12, or in Fredericksburg on October 8, 15, and 24 from 10am- 12 pm.

At our seminar, you will learn:

  • How to protect your assets and obtain valuable Medicaid and Veterans benefits to pay for long-term care;
  • What is the most important planning document, and whether yours is up-to-date;
  • Whether your Will is sufficient to meet your needs, or if a Trust is a better instrument for you!
  • How you can protect your assets from probate, lawsuits, divorce, and nursing home expenses!

It is never too early to begin planning for your future and for your loved ones. In fact, having a plan before you even purchase a home in the first place is wise. Sleeping in a tent may seem like a cool idea for a family vacation or scout camp out, but perhaps not so fun if it is because your children or a creditor kicked you out in the street. Before you sign any deeds to transfer your residence to your children, please consider discussing your situation with a Certified Elder Law Attorney, such as Evan H. Farr.

Please contact the Fairfax and Fredericksburg Medicaid Asset Protection Law Firm of Evan H. Farr, P.C. at 703-691-1888 in Fairfax, or 540-479-1435 in Fredericksburg, to make an appointment for a no-cost consultation.

Fredericksburg Elder Law

Estate Planning

Fairfax Elder Law

 

Long-Term Care

 

Medicaid Asset Protection

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