I often hear from clients serious concerns about what to do with their home in their estate plan. Often at the top of their list is the desire to preserve a residence for one or more of their adult children. Part One of this 2-part series addressed ways to handle your home in your will in a way that preserves it as a residence for one of your children if they should need it.
Many clients also inquire about transferring their property to their children during their life, whether to maintain a residence for one of them, or in an attempt to protect against estate recovery by TennCare. Part Two addresses some of the methods of approaching this issue and the reasons why and why not you may want to make such a transfer.
Give your home out-right to your child during your life.
This option ensures that the child that needs it gains ownership of the house, without it going through your estate and potentially becoming the property of multiple heirs. It may also protect your home against estate recovery by TennCare, if 5 years has passed after the gift before you apply for TennCare coverage.
However, if 5 years have not passed, you may be ineligible for TennCare for a period of time after you apply. In addition, such a gift may have federal gift tax implications for you, and capital gains implications for your child if they sell the home, because a gift recipient assumes the cost basis of the gift purchaser. In contrast, inherited property (through a will or life estate) assumes the cost basis at the time of inheritance. In addition, many clients are uncomfortable about losing ownership of the home. Once given to the child, nothing in the law prevents them from deciding to sell the property or otherwise take action that may not be in your best interest.
Add a child’s name to your deed as joint owner.
This option has certain benefits: If the property is own jointly *with a right of survivorship,* the transference of ownership after one of you passes away is simplified. It ensures that the child you choose gains full ownership in case you pass away, and reserves your ownership if the child were to pass away before you. It also may protect the home from TennCare claims against your estate.
There are a few disadvantages to this kind of transfer. First, as mentioned above, if 5 years have not passed after the gift, you may be ineligible for TennCare for a period of time. Second, also as mentioned above, transfer of a portion of your home to your child amounts to a gift subject to federal gift taxes for you and carries capital gains tax implications for your child. Check with a tax professional to determine the tax considerations in your case.
Give your home to your child but retain a life estate for yourself.
A life estate is an interest in the home that ends at the death of the life estate owner. Your child, or the beneficiary you choose, would own an interest in the home, in that it automatically becomes theirs when you pass away, but you would retain possession during your life. This preserves the home both for yourself and for the child or children you choose. When you pass away, the house passes automatically to the person you have named. That new owner will have a cost basis that, like inherited property, is stepped up to the value of the home at the time of your death, rather than inheriting your cost basis. This likely leads to lower capital gains taxes if the house is eventually sold. If you need TennCare more than 5 years later, the home will be protected from estate recovery. If you need to apply for TennCare in fewer than 5 years, and your transfer leaves you ineligible, you are well-positioned to “cure” that gift by asking your child to return the property to you.
On the downside, while you would have full possession of the home, you would not enjoy full ownership. Once you have deeded the property in this way, you may not sell the house without the permission of the remainder owner. In addition, the gift would have federal gift tax implications.
Regardless of your situation, it may be worthwhile to think through what will happen to your home as you get older.
Please contact us today online or by calling 800.705.2121 to discuss your legal options.