A question I often hear from clients is: “Should I give my house (or camp) to my children?” Clients often believe that deeding the property to others will preserve it in the event of nursing home expenses. Clients may also want to avoid probate or may want children to help with taxes, insurance, and maintenance. It is essential for any client considering this move to know the risks and benefits.
- If the client is able to go five years without needing nursing home care, but later does need such care, the property will not count against the client if the client seeks financial help from the MaineCare (Maine Medicaid) program.
- If the property is out of the client's name at death, the State and other creditors will not have a claim against the property.
- As a condition of transferring the property (especially a camp), children may agree to pay all or part of the property-related expenses, making life a bit easier for a client on a fixed income.
- The client may, if desired, maintain a degree of control over the property with a life lease or life estate.*
Possible risks (and some ways to reduce risks):
- Nursing home expenses: If the client needs nursing home care within five years after deeding the property, and if the client needs to apply for MaineCare (Maine Medicaid), the client will be penalized for the gift and will be ineligible for MaineCare for a period of months or years. The client will either have to go without the needed care for that time period or will have to ask the children to pay for care until the period of ineligibility is over.
- Loss of control: Having given the property away, the client will need to get approval from the children if the client wants to sell or refinance the property. (The client can, however, maintain the right to live in or use the property by insisting on a life lease or life estate.*)
- Child's creditors or divorce: If the child gets into financial trouble or bankruptcy or gets divorced, the child's creditors or ex-spouse may be able to obtain an interest in the property. (However, the transfer of the property to an irrevocable trust may offer some protection against a child's creditors or ex-spouse.)
- Child's unexpected death: If a child unexpectedly dies before the parent, the property may go to the child's own heirs. (The irrevocable trust or a joint ownership arrangement may be helpful in this circumstance as well.)
- Tax consequences: If the client transfers a residence to a child and the property is later sold, there will be a capital gains tax, as the client will no longer be able to use the IRS primary residence exclusion. The client may also lose property tax exemptions, such as the homestead and veteran's exemptions. In addition, the child may later, upon selling the property, pay a higher capital gains tax than if the child inherited it (unless a life estate* or similar arrangement is used).
Caution concerning life estates: Be aware, however, that if you reserve a life estate in the property (treated differently from a life lease under the State's MaineCare rules), this may expose the property at your death to a MaineCare “estate recovery” claim.
Questions for clients:
Before advising a client about whether to transfer property, I ask the client a number of questions, including:
- How is your health? What are the chances that you might need long term care in the next five years?
- Do you have long term care insurance?
- Do you have enough money to pay for nursing home care for all or most of the next five years?
- Are you willing to give up a degree of control to your children?
In short, there is no simple answer to the question “Should I give my property to my children?” While this may be a reasonable step for some clients, for others (especially older people with chronic health problems and little savings) the risks may be too great. Any client considering this move should first obtain legal advice from a skilled estate planning or elder law attorney.