Transferring Your House to Your Children?

One of the most common questions I am asked as an Elder Law attorney is whether someone should transfer their house to their children. Many times this question is asked in connection with Medicaid planning or to avoid probate. There is no easy answer to this question. The answer depends on many factors which are too complicated to discuss in this article. However, there are several factors which a person considering making such a transfer should consider.

First, under the current (2102) Medicaid rules, a transfer of this type must be made at least five years prior to a Medicaid application. Transferring the house within the five year period prior to a Medicaid application may result in a denial of Medicaid and an additional waiting period before Medicaid can be obtained.

Second, the Probate process in New Jersey is not difficult and there is little advantage to transferring your house to avoid the Probate process in this state.

Third, transferring the house into the name of the children means that they, not you, will own the house. Accordingly, the house may be subject to the claims of creditors of your children. In the event of a divorce of one of your children, your house may be “on the table” for equitable distribution between your child and their soon-to-be ex-spouse. If one of the children should die, their interest in the house may pass to their spouse or to their children. In other words, the ownership of the house could be controlled by persons who are not related to you. This may jeopardize your right to continue to reside in the house.

Fourth, under the current Internal Revenue regulations, if you deed your house to your children, they will take the house at your cost basis, i.e., the price you paid when you bought the house. This means that when they sell the house, they will pay gain based upon the price that you paid when you purchased the house against the price for which they sell the house. If you have owned the house for a long time, the gain could be large thus causing your children to pay a lot in income taxes. Rather, if you leave the house to your children in your Will they will inherit the house at its current value and thus pay little or no taxes if they sell the house within a year of your passing.

As you can see, there are advantages to transferring your house to your children, but there are also disadvantages. The decision to transfer your house to your children should be made only after you discuss the legal implications with an Elder Law attorney and the financial implications with a tax accountant.