17 Aug Parents want to give home to their kids
Q. My parents would like to give their home to me and my sister. We each have our own homes and we would probably sell it when our parents are gone. Should they leave it to us in their will, or should they transfer ownership while they’re still living?
A. The answer depends on your parents’ goals.
If they are contemplating the transfer of their house to you and your sister to accelerate Medicaid eligibility for long-term care, it’s not necessarily that simply, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
“They should be aware that the transfer of the house during their lifetime will result in a period of Medicaid ineligibility if they apply for Medicaid within five years of the transfer,” she said.
Whitenack said if your parents are thinking of transferring the home during their lifetimes — whether for Medicaid planning purposes or to reduce federal or New Jersey estate taxes — you and your sister will not receive a step up in basis in the property upon their deaths. That means you and your sister may have to capital gains taxes when the property is sold.
If the property is conveyed to you through your parents’ wills, the property will be included for purposes of calculating federal and state estate tax, Whitenack. The good news is that you will get a step up in basis, therefore you may not have to pay any capital gains taxes if the property is sold shortly after your parents die.
Whitenack said there are alternatives if you’re planning for Medicaid.
Your parents could transfer the house to you and your sister subject to the retention of a life estate, she said.
“The value of the retained `life estate interest’ in the property would be based on the life expectancy of the transferee on the date of the transfer,” she said. “The transferred `remainder interest’ would be owned by the children and would trigger a Medicaid transfer penalty if a Medicaid application was filed anytime during the five-years immediately following the transfer.”
For capital gains tax purposes, Whitenack said, if the home is not sold during your parents’ lifetimes, retaining a life estate interest will ensure that you and your sister receive an adjusted cost basis to the value of the home on the date of your parents’ death.
“This strategy reduces and possibly eliminates the capital gains tax that would be imposed on the children upon their future sale of the home because the children would receive an adjusted cost basis and not the parents’ historic cost basis, typically the purchase price plus the value of improvements,” she said.
But there is also a downside because the full value of the home would be included in your parents’ taxable estate at death, but, the combined estate tax and potential capital gains tax liability imposed on you and your sister by an outright transfer may far exceed the potential additional estate tax liability generated by retaining a life estate, Whitenack said.
She recommends, and we concur, that your parents should discuss their goals with an elder law attorney if financing long-term care is a consideration. Or they should talk to an estate planning attorney if their sole concern is reduction of estate taxes.
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This story was first posted in August 2015.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.