Perhaps the biggest “hidden” issue is the lack of understanding about Capital Gains Taxes. If you transfer ownership to your children they may have to pay crippling amounts of capital gains tax.

For example, if you are like most people in their retirement years, it’s very likely you purchased your home 30 or more years ago. The price you paid for the house at that time was probably significantly less than its current value. You might have only paid $75,000 for the house and now its worth about $500,000. If you transfer the house to your son or daughter and they want to sell it later on, they would have to pay capital gains tax on the difference. This would mean they would be paying taxes on $425,000…this can be a daunting tax liability. And if they use the proceeds to purchase another house, they would have to come up with these taxes out of their own cash reserves. This is usually a high tax outcome that can cause someone to lose the house or have to purchase a much lesser valued property.

If we look at the alternative, transferring ownership of the house through a will or a trust, your beneficiaries will receive what’s called a “step-up in basis” in the house equal to the value of the house at the time they inherited it rather than the value of the house at the time you purchased it. This can save a significant amount in taxes and possibly allow the son or daughter to keep far more of the proceeds from the house rather than using them to pay taxes.

If you make the transfer in a short period of time, you could be prevented from receiving Medicaid benefits. There’s a 5-year “look-back” period for Medicaid eligibility purposes. This means that when your Medicaid application is being reviewed, any gifts or “uncompensated transfers” you have made in the past 5 years will result in a penalty period.

In 2018, every $6,422.00 worth of uncompensated transfers that you made in the past 5 years will result in your Medicaid benefits being withheld for one month.  If we use the example from above, that would mean a gain of $425,000 (divided by $6,422) would potentially delay your benefits for more than 5 years and 6 months! This is a significant delay in benefits and one misconception most don’t understand.

Fortunately, Medicaid does not penalize applicants for transfers that occurred more than 5 years ago. So if you want to make a plan to qualify for Medicaid you should do your planning at least 5 years in advance so you can escape this holding period.

If you transfer your home to your children and then require long-term care within 5 years of the transfer, Medicaid will consider this to be an uncompensated transfer. This type of transfer has the potential to delay your Medicaid benefits and possibly even prevent you from ever qualifying for Medicaid.

There are other reasons why it’s never a good idea to transfer ownership of a parent’s house to children. One area to consider is debt. If you transfer your home to a child with significant debts, then creditors could inquire as to the assets in the child’s name. If your house is in the child’s name then creditors might make claims against that property to recover the debt owed to them. This could result in your child having to sell the house to satisfy the creditors…which would also likely trigger capital gains taxes and other bad things…leaving your child with only a fraction of the benefit from owning a house.

Additionally, if your child becomes disabled and requires Medicaid or government benefits of their own, owning your house could prevent them from qualifying for these benefits. This would happen in the same way that it might prevent you from qualifying for benefits if she needs long-term care.

Another potential issue is divorce. If you transfer your home to your child and then the child goes through a divorce, your house could be considered an asset to be divided or dealt with as part of the property that was co-owned with your child’s former spouse. This could mean they only get half the value of the house and it could trigger those nasty capital gains taxes again so there is a potential double liability hit.

Finally, if your child passes away before you do and you transferred your home to her, then your house could be considered part of your child’s estate. This would mean it may have to go through probate and then be distributed to your child’s spouse or other heirs and it is unlikely you will be able to continue living in it.