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Should I Deed My Home to My Children to Protect It?

Our office often receives many questions from clients wishing to add their children’s names to their homes.  Many people want to do this either avoid probate or to protect the the nursing home taking it away (i.e., Medicaid).  Generally speaking, this should not be done under most circumstances.  There are a number of reasons for not adding your children’s name(s) to your home:

Reason #1: Upon your death, almost all of your assets receive a "step-up" in basis.  “Basis” is a tax term describing the amount of income received when an asset is sold. During your lifetime, if you sell your property, you would have to pay income taxes based upon the asset's gain in value.  Any appreciation above your basis (the original purchase price) will result in taxable income.

Upon your death, your assets are not valued at their original basis, but will receive a new basis based upon the asset’s date of death value.  This is generally referred to as a “step-up” in basis, which allows heirs to sell property without paying taxes on the gain during the decedent’s life.  Thus, your heirs inherit the property with the date of your death value, thus providing a tax free gain in appreciated assets to your heirs.

Gifted property, on the other hand, such as adding children to your home, does not receive the step-up in basis upon death.  The interest in the gifted property has the donor’s original basis, which means that any gain in asset value may be taxed upon sale.  To make things easier, please see the following:

Example 1: Mother purchases house in 1970 for $40,000.  The home has appreciated to its present value of $200,000.  Shortly before her death, mother deeds her daughter one-half the property in order to avoid probate.  Upon her death, the daughter inherits mom's remaining one-half of the property without probate. When daughter sells the house, the daughter would have a $80,000 taxable gain on the property.  This gain would be taxed at a rate that could exceed 40%, based upon daughter’s income tax rate, costing the daughter some $32,000 in income taxes when she sells.  

Example 2: Same facts as above, but mother dies with house in her name. Daughter now sells the property for $200,000. Here, the daughter pays no income taxes from sale as the daughter's basis in the property is now $200,000, allowing her to sell the property tax free.  

The difference in these illustrations is that gifting the one-half interest in the home to the daughter during mom's lifetime did not allow a complete step-up in basis upon death.

Thus, as illustrated above, transferring your home to a child before death to avoid the costs of probate can end up costing much more in income taxes.

Reason #2: There are better ways to avoid probate.  The avoidance of probate is generally a good idea as it will likely save your heirs time and money.  Options vary from creating enhanced life estate deeds to revocable living trust.  Our offices will be glad to discuss these options with you in more detail.

Reason #3: In the event of conflict with your children, you cannot sell or mortgage the house without their permission.  This can potentially create many scenarios for conflict, which we have seen here in our offices.  

Reason #4: Medicaid, the nursing home or “the State” does not take your home in the event you need long-term care in the nursing home.  If your home is worth less than $560,000 according to Florida Medicaid asset limits, your home is not a countable asset for Medicaid purposes.  Thus, your home does not typically need to be "protected" from the nursing home. 

Most people want to avoid probate as part of their estate plans. Two good ways to avoid probate is to either create a revocable living trust or an enhanced life estate deed.

If you would like to know more about estate planning or asset protection planning, you are welcome to attend one of our estate planning seminars. Or, if you prefer, we offer a free initial consultation to review your estate planning goals and create an efficient and effective plan for you and your family.

D. Rep DeLoach III
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Estate Planning and Board Certified Elder Law Attorney
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