What bad things can happen if my parents put their home in my name?
Betty and Frank plan to gift their home to their only son, Bruce. They want Bruce to inherit everything when they die. Right now Bruce is on all bank accounts. He is named as the beneficiary on their retirement accounts and life insurance. The only asset remaining is their home. They want to avoid the need for Bruce to go to the probate court when they die. Visiting with their neighbor over coffee, they learned that they can deed their home to Bruce right now. That way Bruce could avoid the need to probate their estate to change the house title after they die.
Is there a down side to transferring the house to Bruce now? YES. Here is a list of some of the problems that may arise from this early gift.
- Betty and Frank will pay a higher property tax for their home. The home no longer belongs to them, so the reduced property taxes on a residence are not available.
- Bruce will pay a higher “capital gains” tax when he sells the house. What is a “capital gains” tax? There are state and federal “capital gains” taxes on the sale of an asset if it sells for more than the original purchase price (plus improvements). For example: Frank and Betty bought their home 20 years ago for $100,000 and made improvements of $30,000 over the years, resulting in a “basis” of $130,000. Bruce sells the home for $300,000 after his parents die. There is a “capital gain” of $180,000 [$300,000-130,000]. The tax due is about $45,000. No tax would be due if Bruce inherited the home. When an asset is inherited after the death of another, the “basis” is the fair market value at the date of death, or $300,000. When Bruce sells the inherited home for $300,000 he pays no tax.
- If Bruce dies before his parents, his Last Will and Testament states all his assets, including Frank and Betty’s home, go to his wife, Pam, and not to his parents.
- If Bruce is sued, Frank and Betty’s home will be available to pay Bruce’s creditors.
- If Frank or Betty need to apply for Medicaid to help pay for their care as they age, that government benefit will not be available if the house was gifted to Bruce within 5 years of requesting Medicaid.
- If Bruce decides to sell the house, Frank and Betty will have to move.
Even though gifting the house to Bruce seems like a simple solution, this estate planning method is a minefield of problems. Frank and Betty would be better served by talking with an estate planning attorney before “shooting themselves in the foot” with this “common sense” approach.
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