Should you gift junior the house?
One of the questions every estate planner gets is, “should I just give my house to the kids while I’m alive, as opposed to having it go through an estate or trust?” It’s a simple question that, alas, doesn’t have a simple answer. Here are just a few of the things to consider:
It will avoid probate. When assets have to go through the probate court, it costs money and it takes time. If you give the asset away during your lifetime, it doesn’t go through probate. That’s good, but…
Will you need it later? If you have an unexpected financial turn, and you need to get that asset back to help pay the bills, giving it away could be a problem. You can’t just demand it back if it was a gift. Even if you trust your children, what if one of them has an unexpected medical cost? Or gets into some bad investments? Or winds up in the middle of a messy divorce? There are a lot of things that can go wrong.
Doesn’t count for Medicaid. If you end up going into an assisted living or nursing home, you may have to spend down your assets so that Medicaid can pick up the cost. If you don’t own the asset, it doesn’t count against you. If it’s your primary home, Medicaid won’t count it against you anyway (unless it’s more valuable than normal) but they will take a lien against the house which they can enforce later, when you die or move out.
Or does it? It will hurt you, however, if you apply for Medicaid within five years after you made the gift. The Medicaid program looks back five years to see if you have made any “uncompensated transfers” (in English that would be gifts) and if you have, you could be disqualified from the program.
You could lose a tax break. If you have an asset that has gone up in value significantly, and you sell it, you have to pay capital gains tax on the profit. If you give that asset away, nobody has to pay capital gains tax right away, but down the road when the kid sells it, he will have to pay the capital gains tax on the increase it had while you owned it; the tax is deferred until later, but not completely avoided. But if you hold onto the property until your death, and he receives it as a result of your death (and that can be through probate but it can also be through a living trust or a transfer on death deed) it eliminates the back capital gains tax.
And also this tax break. There is a substantial break on the property tax if it is your primary home and you are over 65. But if you transfer the property, even if you continue to live there, you lose that property tax break, and the owner has to pay the full tax.
Who has creditors? If the property is in your name, your creditors could get at it. If it is in your child’s name, her creditors could get at it. So which of you is more likely to have liability issues? Because if it is your child, and her creditors seize the property…
You could be evicted. Yes, you could be evicted from your own home, because it isn’t yours anymore if you gave it away. Come to think of it, even if your child doesn’t have creditors, he or she could decide to evict you. The fact that you used to own it won’t be a defense. A long-term lease may give you some protection on this one.
And this doesn’t even consider gift or estate taxes (although few people need to worry about that any more). There are, obviously, a lot of pros and cons. The best answer I can give to a client, if I’m honest, is “it depends”.
Kenneth Kirk is an Anchorage estate planning attorney.