Most people pass on assets to their children in a will or trust. However, some consider doing so ahead of time. Should you deed your house to your kids while you are still living? Are there certain benefits to this approach? What are potential negative impacts of such a decision?
One of the main reasons that some folks transfer assets while living is to qualify for programs such as Medicaid. Medicaid has both income and asset limitations, so not having ownership of a valuable home with significant equity can help. However, keep in mind that any transfers must be done 5 years prior to applying for Medicaid. This is not something that you can quickly complete when the need for nursing and other long-term health services are already needed.
Risks of Early Transfers
If you transfer properties directly to your children, rather than through a trust or some other estate planning mechanism, there can be significant risks. You will be giving up control over anything related to the property. Think about what this will mean. Will your children allow you to live in that home? Will they decide to sell it early to gain access to the equity? Although you may have an understanding with your children about what the arrangements will be, could that possibly change? This is a very risky move and requires a lot of trust. This is something to carefully consider when deciding if you should deed your house to your kids while you are still living.
Upon your death, if you still have the property in your name, your heirs will receive a step-up in tax basis. This means that they will inherit the property at the value as of your date of death (or six months after your date of death, whichever they choose). If they sell it shortly thereafter and the property has not appreciated in value, they will not pay capital gains taxes. On the other hand, transferring property to children prior to your death gives them a carry-over basis. This means the tax basis you have in the property will be transferred to them, so they will have the same tax basis as you do, which could potentially lead to higher capital gains taxes for them upon the sale of that property.
Disputes Among Heirs
Normally, disputes among heirs occur after death. The deceased is not there to witness the lengthy battles. When it comes to the decision to deed your house to your kids while you are still living, those issues could occur much sooner. This could lead to a very stressful situation for you at a time in your life where you may want to focus more on enjoying your senior years.
Your Overall Estate Plan
Transferring a property while you are still living may have other impacts on your overall estate plan. It is best to consult with an estate planning attorney before making such important decisions. Contact us today to schedule a consultation with our Massachusetts estate planning attorneys. We will review your situation and help you decide whether you should deed your house to your kids while you are still living.