Your home is one of your most significant assets, and you likely have spent many joyful and memorable years in it, raising your children and appreciating life's special moments. It’s no surprise that you may wish to gift your home to your children as part of your estate plan. You may be tempted to sign over your home now to your children to avoid probate or dodge Medicaid claims. While gifting real estate property may accomplish these purposes, it comes with a hefty tax bill and often has other unpleasant consequences.
The legal team of McCarthy & Akers, PLC, in Winchester, Virginia, explains why you shouldn’t gift your home and how an estate planning attorney can help you achieve a better solution.
Why Gifting Your Home Is Usually a Mistake
Simply retitling your home in an adult child’s name may seem like a quick and practical way to bypass probate. However, as estate lawyers, we typically wouldn’t recommend this course of action for one or more of the following reasons.
1. Capital Gains Tax
Capital gains tax is the number one consideration against gifting your home to your adult child. If your child receives the property during your lifetime rather than as an inheritance, they may have to pay a staggering sum in capital gains taxes.
Let’s say you bought your home 30 years ago for $200,000. Today, with market value appreciation, your home is worth $800,000. Your capital gain, therefore, equals $600,000.
If you gift your home to an adult child and they sell it for its current market price, they may have to pay tens of thousands of dollars in capital gains tax. In contrast, an inherited property is subject to a rule known as “step-up in basis,” meaning that your heirs’ cost basis equals what the property was worth at the time of your death, i.e., $800,000. Therefore, the heirs won’t need to pay taxes on the capital gain that occurred during your period of ownership.
2. Medicaid Penalties
Medicaid can collect care costs from a deceased person’s estate by a procedure called “estate recovery,” which may include the decedent’s family home. Some Virginia seniors consider gifting their homes to their adult children to bypass this.
However, Medicaid in Virginia has a five-year look-back period. Gifting real estate property to children may incur penalties or disqualify you from assistance if you apply for Medicaid within five years after asset transfer.
3. An Existing Mortgage
If you are still paying off your mortgage, transferring your home to your adult child’s ownership also makes your child responsible for the mortgage, which may require refinancing. Depending on your child’s circumstances and credit score, this type of financial commitment may be impractical or too costly.
4. Complex Family Relationships
While you may have a trusting relationship with your adult child, life is unpredictable. If you live in the family home after title transfer, you legally become your child’s tenant, with all the potential pitfalls of disagreements over property maintenance or a future sale. Changes in family dynamics may also make you regret your decision to retitle the property in your child’s name.
5. Lack of Control
Once you gift your home to your child, you relinquish any control over the property. The house, which may be your family’s most significant asset, becomes liable to your child’s creditor’s claims in an event like bankruptcy or a civil lawsuit.
If your child divorces, their ex-spouse may claim a share in the property under certain circumstances. Finally, there’s no way you can stop your child if they decide to sell the house and spend the proceeds or use them to fund a risky business venture.
How an Estate Planning Lawyer Can Help You Avoid Probate Without Retitling Your Home
The easiest way to keep your family home and any other assets out of probate is to put them in a trust. Creating a revocable living trust allows you to maintain full control of your assets and use or sell them as you normally would. A successor trustee will take over trust management and handle asset distribution to beneficiaries after your passing.
Placing your property in an irrevocable trust can also protect it from creditors or Medicaid claims. However, an irrevocable trust is a less flexible solution that limits your use of the property.
At McCarthy & Akers, we are your knowledgeable local Virginia lawyers you’re seeking when you search online for a “trust attorney near me.” We provide dependable legal advice and can establish a trust that answers your estate planning needs.
McCarthy & Akers, PLC: Estate Planning Attorneys Serving Winchester and Northern Virginia
A trusted legal partner is a crucial element of estate planning. At McCarthy & Akers, we pledge to help Virginia seniors preserve their legacy, protect their assets, and provide for their families. While other law firms may see you as just a number or another case, we take the time to get to know you and understand your legal needs. We will craft a solution that works best for you.
Our experienced law firm handles wills, trusts, health care directives, durable power of attorney, and any other estate planning tools you need for peace of mind and security.
For trusted legal services by skilled estate planning attorneys serving Winchester and Northern Virginia, call (540) 722-2181 or fill out our online form.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.
McCarthy & Akers, PLC
302 W Boscawen St.
Winchester, VA 22601