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Should I give my home to my child?

Gifting a home to a child can protect assets from Medicaid. However, gifting the home to a child is often a bad idea.

Even presuming that your child has a great relationship with you and is financially secure with no worries about his or her marriage, there are tax reasons not to make the gift. Gift taxes are not a major concern, becuase no gift taxes would be due (in 2014, you can gift a total of $5.34 million over your lifetime without paying gift taxes). However, income taxes are a worry. First, if you’re no longer living in the home, it is likely that the home will be sold. In that case, if the home is in your name you would not pay capital gains taxes under the Section 121 personal residence exception, provided you resided in the home recently.

You will also lose the basis step-up, unless you keep a life estate or right to occupancy for the home. If you did not gift your home to your child and your child inherited the home from you upon your death, then the child would have a tax basis equal to its fair market value as of your date of death. That means if the home sold for what it was worth when you died, your child would not pay any income taxes. That is because the tax basis of that property was “stepped up” to the value at death, and so there would be zero gain upon the sale. For this purpose, the gain is computed as the sales proceeds minus the “tax basis” and since the tax basis was stepped up, the gain zero (presuming the house sold for the value as of death.)

Even more worrisome are concerns about what if your child runs into difficulties of his or her own? For example, I had a client come to me one time who had gifted her home to her son, and she wanted it back. I explained to her that it was entirely up to her son to decide whether to give the home back. Moreover, since her son was married, her son’s wife (mom’s daughter-in-law) also had to sign the deed. Well, that wouldn’t work because the reason mom wanted the house back was because her son having marital problems. She wished she had never gifted him her home because now it was on the negotiating table for the impeding divorce.

Other reasons not to put the house into your child’s name include what if your child dies? Then the house would go to his heirs under his will, or by intestacy. Your home could be at risk. What if your child has debts, or becomes disabled? You never want your child’s problems to bump into your money.

A better alternative, presuming that you won’t need Medicaid for 5 years (3 years for assisted living) in North Carolina would be to use trust based planning to protect your home from Medicaid.

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The Elderlaw Firm

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