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Before You Transfer Your Home to Your Child—Read This
For every person who transfers a home to an adult child without incident, there is another person who regrets the decision to do so. As with other estate planning tools, transferring a residence to an adult child is not always the best option for everyone. If you are considering transferring your home to an adult child, it is important to first consider the risks involved.
Loss of Control
Although obvious, it is important to remember that by giving your home away, you deprive yourself of the right to control it. This means that your adult children can charge you rent to live in the home, or simply kick you out. Moreover, you cannot keep the home from being mortgaged or sold.
Estate and Gift Taxes
If you continue to live in the home until your death and do not pay your children fair market value rent to continue residing in the home, the home will be included in your taxable estate for federal estate tax purposes even though you do not hold legal title to the home. This is because you retained incidents of ownership over the property by not paying rent. Further, if you gifted the home to your child during your lifetime, you likely used a portion of your gift tax exemption amount, effectively wasting some of your gift and estate exemption.
One common reason people choose to transfer their homes to their children is to reduce the value of their estate in order to qualify for Medicaid assistance. However, Medicaid employs a look-back period of five years when determining eligibility for the program. Therefore, if you give your home away within five years of applying for Medicaid, the value of the home will likely be included in the value of your estate, thereby making you ineligible for Medicaid assistance.
Losing the Home to Your Child’s Creditors
It is typically not advisable to transfer a home to a child who is in debt. Although the child could certainly use the assistance, there is often nothing from keeping the home from the claims of your child’s creditors.