By Elizabeth A. Caruso, Esq.
Happy New Year! Here at Elder Law Myth Busters, I want to start off the new year busting the myth in the number-one question I receive from clients: “I can just transfer my home to my child right?” Yes, you sure can, but here are three reasons why you should not do that and what you should do instead.
- If you give away an asset for less than fair market value, there are tax consequences to that transaction. You, as the gift giver, potentially need to file a gift tax return reporting the gift. If the amount gifted is very large, then a federal gift tax may be owed, but at minimum, the amount of the gift will be from your lifetime exclusion. Additionally, the recipient of your gift receives the asset at your tax basis, meaning the amount you paid for it plus improvements, and all of the untaxed gains that come with it. If they later sold the asset, they would be responsible for all of the tax on the gain, not just from the time they received the asset.
- Giving away an asset to someone else puts them in control instead of yourself. Once it’s gifted, you don’t make the decisions anymore. If it’s a house and you want to borrow from the equity, the new owners need to sign onto that equity loan, too. What if they have bad credit and now you don’t qualify? What if they have bad credit and now their creditors attach your home?
- If you are worried about long-term care costs, any transfer of any asset to any other person comes with a five-year look-back period from the date of the transfer. This means that from the day you transfer your house, you need to stay out of the nursing home for at least five years for the transfer not to count against your eligibility for long-term care benefits. Otherwise, it is a disqualifying transfer and you are penalized.
These consequences can be avoided with the correct estate plan. It is possible to protect your home in a way that does not trigger unintended tax consequences or put it at risk of another’s creditors and start the five-year look-back period.
An elder law attorney can walk you through these options and help you protect your home in a way that also protects you.
About the Author: Elizabeth A. Caruso, Esq. is an attorney at Legacy Legal Planning, LLC, in Norwell. She has been practicing estate planning, probate, and elder law on the South Shore for more than a decade. If this article has sparked questions for you, please feel free to reach out via phone 781-971-5900 or email elizabeth@legacylegalplanning.com to schedule a time to discuss your unique situation.
