Many of us relish the opportunity to save time and money by taking advantage of shortcuts—and estate planning is no different.
To this end, you may have heard that if you transfer your house to your adult children, you can avoid selling the home if you need to qualify for Medicaid. You may think transferring ownership will help your eligibility for benefits by reducing your assets and that this strategy is easier and less expensive than proper estate planning.
Some people also believe that by transferring ownership of their home to a child, her or she can reap a financial windfall by selling the house and cashing in on its equity. Such a gift may seem like a quick and easy way to pass on wealth without spending the time and money to put the property in a will or trust.
However, both of these tactics are a big mistake. Transferring ownership of your home like this can not only delay—or even disqualify—your Medicaid eligibility, but it can also lead to burdensome (and totally unnecessary) tax liabilities.
In 2006, Congress passed the Deficit Reduction Act, which included a number of provisions aimed at reducing Medicaid abuse, including a five-year “look-back” period for eligibility.
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.
So, if you transfer your house to your children and then need Medicaid benefits within five years, it may significantly delay your qualification—and possibly prevent you from ever qualifying.
A potentially huge tax burden
Another drawback to transferring ownership of your home is the potential tax liability for your child. You may have owned your house for a long time, and its value has dramatically increased, leading you to believe that by transferring it to your child, he or she can make a big profit by selling it.
Unfortunately, if you do that, she or he will have to pay capital gains tax on the difference between your home’s value when you purchased it and your home’s selling price at the time it’s sold by your child. Depending on the home’s value, these taxes can be astronomical.
In contrast, by transferring your home at the time of your death, your child will receive what’s known as a “step-up in basis.” It’s 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.
No substitute for proper estate planning
Given these potential problems, transferring ownership of your home to your children as a means of “poor-man’s estate planning” is almost never a good idea. With us as your Personal Family Lawyer®, we can help you find better ways to qualify for Medicaid and other benefits, while also minimizing your beneficiaries’ tax liability. Contact us today to learn more.
This article is a service of Steven S. Boss, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today at (214) 295-3063 to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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