3 Reasons Why Transferring Ownership Of Your Home To Your Child Is A Bad Idea

Whether it’s to qualify for Medicaid, avoid probate, or reduce your tax burden, transferring ownership of your home to your adult child during your lifetime may seem like a smart move. But in nearly all cases, it’s actually a huge mistake, which can lead to dire consequences for everyone involved.

With this in mind, before you sign over the title to your child, consider the following potential risks.

Your Eligibility For Medicaid Could Be Jeopardized

With the cost of long-term care skyrocketing, you may be worried about your ability to pay for lengthy stays in an assisted-living facility or a nursing home. Such care can be extremely expensive, with the potential to overwhelm even those families with substantial wealth.

Since neither traditional health insurance nor Medicare will pay for long-term care, you may look to Medicaid to help cover the costs of long-term care. To become eligible for Medicaid, however, you must first exhaust nearly every penny of your savings.

In light of this requirement, you may have heard that if you transfer your house to your adult child, you can avoid selling the home if you need to qualify for Medicaid. You may think transferring ownership of the house will help your eligibility for benefits, however, this tactic is a big mistake on several levels. It can not only delay—or even disqualify—your Medicaid eligibility, it can also lead to other serious problems. Here’s why: In February 2006, Congress passed the Deficit Reduction Act, which included a number of provisions aimed at reducing Medicaid abuse.

One of these provisions was a five-year “look-back” period for eligibility. This means that before you can qualify for Medicaid, your finances will be reviewed for any “uncompensated transfers” of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility.

In light of this, if you transfer your house to your child and then need long-term care within five years, it could significantly delay your qualification for Medicaid benefits—and possibly even prevent you from ever qualifying.

Your Child Could Be Stuck With A Massive Tax Bill

Another drawback to transferring ownership of your home to your child is the potential tax liability. If you are elderly, you’ve probably owned your house for a long time, and its value has dramatically increased, leading you to believe that by transferring your home to your child, he or she can make a huge profit by selling it.

However, if you transfer your home to your child during your lifetime, he or she will have to pay capital gains tax on the difference between your home’s value when you purchased it and the home’s selling price at the time it’s sold by your child. Depending on your home’s value, that tax bill can be quite high.

In contrast, by transferring your home at the time of your death via your estate plan, your child will receive what’s known as a “step-up in basis.” This tax savings is one of the only benefits of death, and it allows your child to pay capital gains taxes when he or she sells your home, based only on the difference between the value of the home at the time of inheritance and its sales price, rather than paying taxes based on the home’s value at the time you bought it.

Capital gains tax is only one kind of tax that could be impacted by a transfer of your home during your lifetime. You may also destroy valuable property tax basis, which could cause a re-assessment of your home for property tax purposes, depending on the county or state your home is located in.

There are much better ways to avoid probate using estate planning, such as by putting your home into a revocable living trust, in which case your home would immediately pass to your loved ones upon your death, without the need for any court intervention, called Probate.

Your Home Could Be Vulnerable To Debt, Divorce, Disability, & Death

There are a number of other reasons why transferring ownership of your house to your children is a bad idea. If your child takes ownership of your home and has significant debt, for example, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts.

Divorce is another potential issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, the settlement decree may force your child to sell the home or pay his or her ex-spouse a share of the home’s value.

The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise their eligibility, just like it would your own. And if your child dies before you and owns the house, the property could be considered part of your child’s estate and end up being passed on to your child’s heirs or other beneficiaries, leaving you homeless.

THERE’S SIMPLY NO SUBSTITUTE FOR PROPER ESTATE PLANNING

Given these potential risks, transferring ownership of your home to your adult child as a means of “estate planning” is almost never a good idea. Instead, let Soto Law Group help you find alternative solutions. With our guidance and support, we will not only help you protect and pass on your home, but all of your family’s wealth and assets, and legacy. Call us today to set up a consultation at (949) 945-0059.

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