Transferring property to your children during your lifetime is not something that an experienced attorney would recommend.
Some consequences of giving up your property are mentioned as under:
- Transfer of property will result in gift tax. A gift tax form is required to be filed when a property worth $13,000 or more is transferred. Whereas, according to current laws, assets of about $5 million can be gifted during a lifetime without gift taxes. If the worth of your house is less than $5 million, there is a possibility that you won’t be required to pay gift tax. However, a gift tax form will still have to be filled out. There may be a chance that you won’t have to pay gift tax but in case your children decide to sell the house straightaway after the transfer, they will have to pay precipitous taxes. This is because tax basis (the original worth) of the house for you will now be considered the tax basis for your children. In order to avoid paying these heavy property taxes, your children will be required to live in the house for a period of about 2 years at least. Moreover, inherited assets don’t incur gift taxes.
- In addition to the tax consequences, if you gift your house to your children, you will be affecting your eligibility to go for Medicaid coverage in case of prolonged medical care. The ineligibility for Medicaid coverage will prolong up to a period of 5 years from the date of transfer.
- Giving your house to your children also exposes it to your children’s creditors. These creditors may sell the newly transferred house to fulfill some judgement against your children.
- There is a possibility of the death of your child to whom you transferred your property. In such a case, the property will further be transferred to your children’s heirs and they may not want you to share the house with them.
- It should be known that if your house has an appreciated worth, your child may be required to pay substantial capital gains tax if he or she sells it. However, if your house gets inherited by your child, he will get a stepped-up basis. This makes capital gains taxes only to be the responsibility of your child, if they sell the house for a value more than that on the date of your death.
Before you consider transferring your house to your children, you should know that the situations may not turn out to be as you envisioned, eventually leading to unfavorable consequences. If you want to make sure that your wishes are observed, get a will or trust properly drafted. Another option worth considering is Enhanced Life Estate Deed. You can also sell your house to your children. However, before you decide to give away your house, it will be wise to consult an experienced real estate attorney and get advised regarding the best method possible for the transfer of your house.