Gifting your house to your children before your death offers several advantages, however there are issue to avoid.
Shall your children inherit the property through your estate, the cost basis on the property will be the value of the home on the day of your death. However, if you gift the children the property while you are still alive, they will inherit your cost basis, including potentially large capital gains if they decide to sell the home at a later date.
You should still consider removing the property from your estate to help you better qualify for assistance with long-term-care costs. However, be aware that you are subject to a five-year look-back on assets. That means that when you apply for Medicaid, gifts or transfers of assets you make within five years of the date of the application for assistance may be subject to inclusion in your estate.
If you want to keep living on the property but hand ownership over to your children for estate-planning purposes, consider that your child will technically be your landlord. We advise our clients to make it clear up front who will be responsible for utilities, maintenance and any associated costs, and any desired renovations or updates along the way. It’s best practice for you to put these intentions in writing from the start.
Parents who want to stay in their house but no longer include any appreciated value on the home in their estate might want to consider a qualified personal residence trust, or QPRT. This instrument allows the gifting process to begin while you retain control of the house and still live in it. In most cases you would retain the right to live in the house rent-free for a specified period of years (10 is common), after which point the remainder beneficiaries of the trust become fully vested in their interest in the primary residence.
Be aware that an existing mortgage on the property can be problematic. Some mortgage lenders will call in their loans when the property are transferred to others, meaning your child could have to take out a mortgage with an interest rate and other costs that are higher than what you’ve been paying. If your child is allowed to assume your mortgage, he or she needs to be clear on all terms and future costs.
Contact one of our seasoned attorneys to discuss your estate planning needs.