I am often asked by clients whether or not they should gift their house to their children. You're not going to like this lawyerly answer, but, it depends. What are you trying to achieve?
If you are transferring your house to your child as a gift with the intent that your child will live in it as their primary residence, then a gift may be something to consider. This scenario is not all that common.
More common, transferring assets to a child is an attempt to garner some type of asset protection. For example, in Wisconsin, an unmarried person applying for Medicaid cannot have countable assets in excess of $2,000. Without a spouse at home, the house can be considered a countable asset and may need to be liquidated should long-term healthcare be needed.
In light of this, many families consider transferring their house to their children with the idea that if long-term healthcare is needed, the asset is no longer theirs and they will be eligible for Medicaid. There is some viability to this strategy, but there are also some problems. There may be some better options.
A number of years ago, I was contacted by a family that had previously transferred their house to their child's name in an attempt to protect the asset from future nursing-home expenses. Several years after the house was transferred, the adult child, who now held the house in his name, suffered a medical tragedy and needed full-time care in a nursing home. His mother's house was in his name.
The house that was transferred to the child to "protect" the house, now has to be liquidated to pay for the child's healthcare.
What about Taxes?
One thing that is often overlooked is the tax consequences. Under our tax system, if you gift a house to your child, and they later sell that house, they retain your original cost-basis, which could result in significant taxes owed when they sell the house.
Contrast this to a transfer at death, where the recipient receives a "step-up" in basis, which could eliminate their taxes on the sale altogether.
What's the solution?
Rather than transferring the asset directly to your child, consider transferring your home to an IRREVOCABLE TRUST with your child as the beneficiary. With a properly drafted irrevocable trust, you can maintain the tax benefits, protect against creditor issues, and start to acquire the asset protection that was originally desired, while also creating asset protection for future generations.
Contact one of our attorneys at our Wisconsin (414-253-8500), Minnesota (612-204-2300), or California (310-438-4020) locations to make sure your assets are properly protected or for more information on a Trust, Will, Life Estate, Medicaid Planning, or Estate Planning.