One of the frequently asked questions of elder law attorneys is whether a client should give their home to one or more of their children. The reason for wanting to give the home to their children varies from client to client. However, one of the primary reasons is to protect the home from the cost of nursing home care that could occur in the future. Giving your home away is not something that should be done without careful consideration of the personal and financial consequences.
Keep in mind that when you give your home to your children, you no longer have legal ownership of the home. The deed will show your children as the owners. If you wish to sell the home, your children have the power to place the home up for sale. They would be legally entitled to the sale proceeds. If you have a falling out with your children and wish to have the home returned to your name, they will have to consent to the return of the property. It is not unusual for a family to have a falling out, often due to conflict with in-laws.
Another reason your home could be affected by a transfer to your children include the possibility that one of your children could have financial problems, such as bankruptcy and divorce. And if you do not own your own home, you can no longer alter the distribution of the home at your passing, through your will or other estate planning document.
One of the financial reasons to consider before transferring your home is the loss of any government benefits that allow a reduction in real estate taxes. One such program is Pennsylvania’s Property Tax Rebate Program that requires you to have an ownership interest in the property. The other program is Pennsylvania’s Homestead Tax Exemption, that requires you meet the criteria for ownership as well. A home transferred outright to your children would not qualify for Homestead relief unless you had an agreement that permitted you to reside in the property for your lifetime.
Lastly, the Capital Gains Tax is an issue when transferring your home to your children. While you are entitled to an exemption from Capital Gains Tax if you sell your own home, your children are not entitled to that exemption if they are selling your home and do not reside there.
Given these negative consequences of transferring your home to your children, I generally advise my client not to do so unless they have an only child who intends to live in the property after the parent has passed. I would rather see my clients use an Asset Protection Trust to shelter their home or other assets from potential nursing home costs.
Asset Protection Trusts allow a client the right to reside in their home for the rest of their lifetime. The children will not on the home until my client’s passing. Therefore, the home is protected from the children’s lives and any falling out that my clients may have with one or more of them. My clients can sell the home and the money is protected in the trust.
The various tax concerns are also not affected when using an Asset Protection Trust. My clients who use a trust can still qualify for real estate tax reductions and the exemption from Capital Gains Taxes upon a sale. Perhaps most importantly, a client can alter the beneficiaries of a trust, allowing them to change their mind as to how the home will be distributed at the time of their passing.