By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Attorney
A client purchased their home in 1971 and paid $75,000 for it. Over the years they put an additional $150,000 of renovations into the home. The home is now valued at $875,000. The parents want to change ownership to the house so that it will be owned by the parents and their son jointly with rights of survivorship. Their question to me is, will Medicaid penalize this transfer? Then I’m asked if it is a better approach to transfer the house outright to their child now to start the five-year look back period under New Jersey Medicaid?
I’m not always a big fan of outright gifting valuable assets to children without compelling reasons. Generally (but not always), I think everyone is better off using a trust or waiting until the owner dies. A transfer of the home to a child will cause five years of ineligibility for Medicaid benefits for both parents. Depending on their health and other resources, this may or may not be a risk they should take. A transfer outright to a child has several drawbacks, including the following: The house is subject to claims of creditors and others should the child be sued or divorced or pass away. In addition, when the child sells the house, he/she will have to pay capital gains taxes calculated on the difference between the parents’ purchase price, plus the value of the improvements made to the property, and the son’s selling price. While you may not have to pay gift taxes on the gift or capital gains when your children sell the house, they may be facing other significant taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. If the children sell the house, they will have to pay capital gains taxes on the difference between your purchase price and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.
These risks are avoided by transferring the house to a properly-drafted irrevocable grantor trust. The trust protects the house for the parents (and the son and his family as well) and gives the son a “step-up” in basis upon the parents’ death, reducing or eliminating capital gain taxes.
When you give anyone property valued at more than $14,000+ in any one year, you are supposed to file a gift tax form. Also, under current law, you can gift a total of $5.34 million over your lifetime without incurring a gift tax. If your residence is worth less than $5.34 million, you likely won’t have to pay any gift taxes, but you should still file a gift tax form.
Inherited property does not face the same taxes as gifted property. If the children inherit the property, the property’s tax basis is “stepped up,” which means the basis would be the value of the property at the time of the owner’s death. However, the home will remain in your estate, which may have estate tax consequences.
Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage for long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult with an elder law attorney, who can advise you on the best method for passing on your home.
To discuss your NJ Medicaid and other elder law matters, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at email@example.com. Please ask us about our video conferencing consultations if you are unable to come to our office.