What’s the Best Way to Transfer My Home to My Child?

When estate planning, determining the best way to transfer the ownership of a home from parent to child has many implications—especially for seniors.

There are 3 ways to transfer the ownership of a home from parent to child:

1. Outright gift
2. Gift with a reserved life estate
3. Gifting by trust

Outright Gift

The problem with an outright gift is that the child would lose what’s called the step-up in basis.

Step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the taxed value of the asset is determined to be the higher market value of the asset at the time of inheritance, not the value at which the original party purchased the asset. Investopedia

This means the child would pay capital gains tax on the entire amount of the value of the house going back to the time it was purchased by the parent, less the value of any improvements that were made to the property. They would also lose the exclusion from income tax of $250,000 for a single person and $500,000 for a couple.

Life Estate

A life estate means that the house is deeded to the children, but the parent reserves the right to live in the house for the remainder of their life. This makes it possible to avoid the capital gains tax. When the parent dies, the children will get a step-up in basis.

The disadvantage of a life estate is that if the house is sold during the parent’s lifetime and the parent is on Medicaid, Medicaid is going to attribute a value to that life estate. Medicaid will say the money from the sale of the house came back to the parent and disqualify them from Medicaid benefits for a period of time based on the value attributed to the life estate.

Trust

The advantage of a trust is that by transferring the house from the parent to their child as trustee, it’s possible to get the step-up in basis. The trust also protects the house from Medicaid claiming an interest when the house is sold, provided that the trust is in existence for at least 5 years before any application is made for Medicaid.

If you are choosing to gift via a trust for Medicaid purposes, it’s important to remember that seniors have to give up substantial control of the trust. Seniors need to calculate their yearly expenses, as they can only withdraw income earned from the trust and not the principal assets in the trust.

Although the parent should not be the trustee of the trust, there are legal mechanisms in which the parent is still involved in the administration of the trust. The parent can decide to change the trustee at a future point, and it is also possible to change beneficiaries of the trust.

Before deciding which gifting method may be the best for you and your children, consult with an attorney about the various estate and income tax consequences.

Robert W. Shaw, Esq.
(914) 328-1222
E-mail Bob

Tags: Estate Planning, Robert W. Shaw