20 Apr What are the pros and cons of transferring a home’s title?
Q. What are the advantages and disadvantages of a parent transferring the title of a home to a child? The parent is 90 and has a will giving the home to the child. It was purchased 20 years ago for $300,000 and is now worth $400,000. The child stays there from time to time to care for the parent but does not live there. Other assets are less than $1 million.
A. There are two main reasons why parents want to transfer their home to their children.
First, they believe they can protect the house in the event that the parent needs to move to a nursing home. Second, they want to avoid probate.
“Since probate is a very simple process in New Jersey, probate avoidance alone is not a good reason to transfer the house to a child,” said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.
She said the transfer of the house to a child who does not live there will be subject to the five-year look-back rule for Medicaid.
“This means that if a parent transfers the house to the child within five years of applying for Medicaid, the transfer will cause a penalty which will begin when the Medicaid application is submitted,” she said. “The length of the penalty period depends on the value of the house.”
So if the parent may need nursing home care within the next five years, the parent should have other assets sufficient to cover the penalty period or wait five years before applying for Medicaid.
The transfer of the house may also result in significant capital gains tax to the child when the house is sold, she said. This is because the child will receive the house with the carryover basis of the parent.
“However, if the child inherits the house, the child will get a step up in basis, meaning that the basis will be the value of the house at the date of death,” she said.
If the parent transferring the house retains a life estate, meaning the right to live in the house, then the property will get a step up in basis to the value of the house at the date of death, she said.
“If the house is sold while the parent is still alive, however, the value of the life estate interest will be excluded from income tax but the value of the child’s remainder interest in the house may be subject to capital gains,” she said.
Finally, if the house is transferred to a child who has financial troubles the child’s creditor may be able to force the child to sell the house, she said.
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This story was originally published on April 20, 2021.
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.