Many people believe that simply transferring their home to their loved ones is an easy way to avoid estate planning. However, there are several hidden dangers that you need to consider before making the transfer.
Hazard #1 – Tax Issues
When you transfer property without a sale, you also transfer any tax liability. If you’ve lived in the house for a long time, the value has probably increased significantly. When they finally go to sell the house, they will be responsible for the tax on all the gain since you originally purchased the property. Even worse, they would not be allowed to claim the primary residence exclusion unless they lived in the home for 2 out of the last 5 years.
Hazard #2 – Medi-Cal
If you transfer your house within 5 years of needing Medi-Cal assistance for a nursing home, the value of the home could be counted against you for qualification. Medi-Cal has a “look-back” period where any gifts or property transfers are considered in the eligibility requirement. This could result in months or years of Medi-Cal ineligibility, depending on the value of the home.
Hazard #3 – Divorce
Your loved one could get divorced. During the divorce proceedings, the value of the home will be considered during the divorce proceedings. It could end up being split between them or could change any family/child support award.
Hazard #4 – Bankruptcy
Unfortunately, hard times can hit anyone. The home would be an asset to be included in the bankruptcy estate. The bankruptcy creditors could demand some or all of the home and/or any rents from the home. If you are depending on the home for yourself or the rent to pay for an assisted living facility, you could lose the ability to stay at the home or use the rents for yourself.
Hazard #5 – The Unknown
If something happens where they become incapacitated or predecease you, the property will need to be distributed according to their estate plan or probate. If they become disabled, the home could cause them to be ineligible for Medi-Cal. There is virtually no limit to the scenarios that could occur.
Hazard #6 – Your Loved One
After transferring ownership, your loved one will have control over the home. Even if you only transfer a portion, they have to agree to any sale or refinance. In a worst case scenario, your loved one could sell the home right out from under you. While it is hard to imagine your dear child or loved one would do such a thing, it happens more often than you can imagine.
The bottom line is that you need to be careful when transferring or sharing ownership of your home. There are several options that could achieve your goal of an orderly and affordable transfer but it is important to work with a qualified estate planning and trust attorney who knows how to utilize the best (and safest) legal strategies available.