Some Things Bear Repeating

Wanting to protect your home and pass it on to your kids is a universal desire. But there are good ways and bad ways to do that. An old adage that “timing is everything’ applies.

A common statement is “I want to give my home to my kids”. This is a natural human desire, but the potential downsides are serious. You wouldn’t put the house in the name of a minor child and probably not a young adult either. And there is often that concern about the person your adult child married. There is almost no situation where it is legally or financially wise to put your home directly into your children’s names. What if they should die, get sick, divorced or sued? Your home is then at risk. A commonsense quote is “Bad things can happen to good people”. My now deceased mother is an example. She wanted to protect assets, and she got the same advice given here. She followed the advice, “Don’t put your house in the children’s names.” She put assets into a special kind of irrevocable trust. It was fortunate she did that, because several years later my brother came down with very serious cancer and while he survived, everything he owned went toward his care. This could happen to anyone.

Another potential downside to putting the home into your children’s names, if you decide to sell your home. If the home is in your children’s names, it is no longer yours, and if they don’t live there, both Connecticut and IRS will hit them with a capital gains tax on the difference between what you paid for the house, plus improvements, and what they get from the sale. That could mean tens of thousands of capital gains tax. That very costly outcome could be avoided by using a type of trust that will preserve the $250,000 exemption from capital gains tax that every taxpayer has on the sale of their primary residence, as long as they have lived in the home for two out of the last five years. That is a $500,000 exemption for a married couple.

Another thing to keep in mind is that with a married couple, the house will not be lost or taken by the state if one spouse needs Medicaid and the other does not. The house can be transferred to the healthy spouse at the last minute, even if the sick one is already in a nursing home. There is no rule forbidding such a transfer. What is needed, however, is the sick spouse’s signature on the deed, or a power of attorney that has gifting powers allowing such a transfer to the healthy spouse. In Connecticut that power to gift real estate must be explicitly stated in the power of attorney. That all important power of attorney is of critical importance if a house or other assets need to be transferred to the healthy spouse due to sudden illness, so get it done right.

Other Medicaid rules may also protect the family home. For example, if there is an adult child who is considered to be disabled under the social security disability laws, the house can be transferred to that child and it will not disqualify the parent from receiving Medicaid. This may not be a solution if the child is also on Medicaid, but that is where the knowledge of an elder law attorney comes into play.

Yet another rule says that if a child lived with a parent and gave the parent care that kept the parent out of a nursing home for two years, the parent can transfer the home to the child, under the “caretaker child” rule, and the transfer will not keep the parent from getting Medicaid.

As you can see, Medicaid rules, tax law, the family situation, and the uncertainties of life can lead to a multitude of different situations, and none of them can be predicted. What can be done, is to have the legal tools in place that will allow you to take the steps to protect your home, and other assets, if needed. The best option for everyone is a comprehensive and up-to-date power of attorney, with all the powers needed. For some, a revocable trust may be useful. For those getting up in years, an irrevocable trust may be advisable. So if you begin to have those thoughts about giving away your house, get thorough and competent advise on whether it is advisable for you and how best to do it.