Should You Leave Your Home to Your Child?
I was recently asked by a client whether putting their home into their kids’ names could make things easier when they pass away. This client wanted to make sure they established their estate plan correctly to make the home transfer simple for their children.
This client had heard about Medicaid, the five-year look back, and how horrible probate can be for a family. They wanted to make sure their financial and legal affairs were set up to avoid these problems.
Therefore, the client’s thought was to simply title their home in their children’s names in hopes that the home would transfer to their children immediately after death. They also hoped it would start the five-year look back for purposes of Medicaid planning — should they need long-term care in the future.
However, this is one of the worst decisions a family can make. The following are three important reasons why putting your home into your kids’ names is a bad decision:
1. Creates a Taxable Gift
A person can gift up to $15,000 per year to any person without creating a taxable gift. Any amount over $15,000 must be reported as a taxable gift. If you give your home to your children during your lifetime, you have made a taxable gift which must be reported to the IRS.
2. Loss of Step-Up in Tax Basis
When a person receives an asset at death, the benefit of the transfer of that asset at death is that it has a step-up in tax basis for purposes of calculating capital gains tax liability. For example, John owned 100 shares of ABC Corp, worth a total amount of $5,000. John purchased the 100 shares 20 years earlier for $1,000.
When John dies, the shares transfer to Dan, who sold the shares for $5,000. Although John’s tax basis was $1,000, which would have subjected John to capital gains tax on the $4,000 gain ($5,000 minus $1,000), if John sold his shares during his lifetime, Dan’s tax basis is $5,000 and not $1,000. Dan receives a tax basis of the date of death value. This means that when Dan sold the shares for $5,000, he owes zero capital gains tax.
If John gave the 100 shares to Dan during his lifetime, Dan would have a carry-over tax basis and Dan would owe capital gains taxes on the $4,000 gain — just as John would have when John sold the property.
Giving your home to your kids results in your kids receiving a carry-over tax basis and losing the step-up in tax basis at death.
3. Subjects the Property to the Creditors of Your Kids
When you give your home (or any other property) to your kids, your property becomes their property. This means that, under law, it is no longer your property. If your kids get sued, the property can be seized. If your kids get divorced, the property can be subject to division.
Take for example if you change the title of your home from your name to your son’s name, but you remain in the home. If your son gets sued and a judgment is obtained against your son, you are suddenly faced with the possibility of your home being seized by your son’s judgment creditor.
As you can see, putting your home in your kids’ names is just about the worst thing you can do. Before making such an important legal decision, you need to speak with an attorney.
The attorneys at Aronoff, Rosen & Hunt, LPA are here to help you! Please contact our office at (513) 241-0400 or use our contact form to schedule a time to discuss this topic with an attorney. Our Estate Planning team looks forward to speaking with you!