Introduction

Madison: Hello, everyone, and welcome to Not Just Numbers Honest Conversations with a Financial Advisor and Lawyer. I am Madison Demora, and I am here with Mike Garry. Mike is a financial advisor and the CFP and the founder and the CEO of Yardley Wealth Management. He is also an estate planning lawyer, and his law firm is Yardley Estate Planning. Hey, Mike.

Mike: Hey, Maddie. How are you?

Madison: I’m great. I’m great. So, today we are going to discuss a common estate planning question, which is, should I transfer my house into my children’s names? The answer, as often with legal matters, is it depends. For many, their home is a cherished asset they wish to protect for the next generation. So Mike and I are here to guide you through this complex decision and help you weigh the important considerations.

Mike: Sounds like a plan, Madison.

Reasons for Transfer

Madison: All right, so, Mike. Why do people think they should transfer their house into their child’s name?

Mike: Okay. I think there are a couple of different things that go on here, Maddie. So I think a lot of people are afraid that if they don’t have enough money for a nursing home, like, the nursing homes going to take their house, or they’re afraid that if they have their house in their name when they die, that their heir is going to pay a lot of taxes or it’s going to be a hassle for them to get it. So they figure, well, I’ll just sign it over to them right now. I think those are, like, the main reasons that we see people do that.

Security Risks

Madison: Okay, so what are potential risks of losing security in your residence after transferring your house into your child’s name?

Mike: Sure. There are a couple of serious ones. Right. So once you make that, if you transfer your house to your child’s name and you just sign it over, there are serious risks. First, it’s not entirely unheard of for some child to get greedy and evict their parent. That has happened. Doesn’t happen all the time, but it could happen. Your son or daughter can just kick you out of your home because you’re not the owner anymore. A more common occurrence would be if your children get into some sort of financial difficulty. They could use the house as collateral for a loan, and if they have trouble paying it off, there could be a lien against the house, or they could even lose the house in a bankruptcy proceeding. So when you give away that title, you lose the security that’s involved in that house, and you might have real serious issues from there. So if someone says they want to give their house to their kids, the first question is, do you still want to live there? Because if you do, then you’re opening yourself up to those giant risks.

Tax Consequences

Madison: Okay. How do tax consequences differ between gifting a house to your child during your lifetime and bequeathing it to them in your will.

Mike: Okay. Yeah. That’s a big difference. When you die, your beneficiaries get a step up in basis to the fair market value at the date of your death. So if you buy a house for $200,000 and you live in there for 10 or 20 years and you die, it’s worth $500,000. When your child inherits it, their cost basis is $500,000. Right. So they don’t owe money on that gain. Now, it will be subject to inheritance tax in Pennsylvania, which is four and a half percent. Right. So it has to pay four and a half percent of $500,000. So, like $22,000 or $23,000 in taxes. New Jersey, if your child inherits it, they wouldn’t have to pay that. So people think that they’re getting away from this inheritance tax by just giving the property to their child, but instead, you would save them the inheritance tax, but instead, you give them a much bigger taxable income. So instead of that being stepped up in basis, your child inherits your house. I mean, you give your child your house, they go to sell it. Well, they’re going to have a gain on the difference of $200,000 to $500,000. So you’re going to have a $300,000 gain that’s going to be on top of their regular income. Right. So that’s going to be taxed probably at 35 or 37%. So you’re going to owe, like, $110,000 in taxes on that. So, yeah, they’re going to save $22,000 from the inheritance tax, but their net out of pocket is going to be $90,000 worse because of the income taxes. So anytime you want to give your house away, you need to seriously think about the financial repercussions to your children and the real life security risk that you’re taking by doing that. It’s a great question. Thanks for asking, Maddie.

Medicaid Impact

Madison: Yeah, absolutely. So how can transferring a house impact your eligibility for Medicaid benefits if you require nursing home care within five years of the transfer?

Mike: Yeah, so that’s the thing. Right? A lot of times, people.. I think people know this now, but I think before they didn’t. But, you know, if you make a transfer within five years of applying for Medicaid, you know, they go back and look at all of your financial records and see there was a transfer and you’ve received no value for it. That transfer is going to be part of your whole Medicaid package and application package, and you’re going to be penalized for that. You might have to delay or not get benefits for a certain amount of time for making that transfer. So in all of these situations, it really makes sense to take a look at your overall situation and go over it with an elder lawyer or your accountant, somebody. Don’t just make this decision willy nilly to do something.

Family Relationships

Madison: Okay. So how might family relationships be affected by the transfer of the property? And what precautions can be taken to prevent conflicts?

Mike: Sure. Well, you know, a lot of people have multiple children. They don’t leave the house to multiple children when they do this. Often, they will sign it over to one child who lives near them or maybe lives in their house. Well, what about the other two, three, four or one kids? Like, maybe that will really damage the relationship between your children. Right. So you really need to do this as part of a well thought out and articulated plan so that your kids know what is going on and the reasons behind it. They might not like the reason, but it’s better than having them guess for the rest of their lives.

Assessment Considerations

Madison: Yeah. Absolutely. So how should you assess whether transferring your house is a good decision based on your unique financial and social circumstances?

Mike: Sure. You do it with the help of a financial advisor and an estate planning lawyer or an elder lawyer. You know, one of the things here is that, you know, instead of just giving away, you can put assets into an irrevocable trust. And if you do that, and you do that more than five years before you would apply for Medicaid, those will come out of your personal circumstances. And yes, it may help you qualify for Medicaid sooner, but you have to put them in an irrevocable trust and not have control over those assets. And that’s a big question. That is a big decision. It shouldn’t be done lightly. It should be part of a well thought out thing. And it’s a hard area. Right. Because people just hear rumors like, oh, I might lose my house. And then there are elder lawyers out there who sell packages for 10, 15, 20, $30,000. They’ll have this whole trust thing set up. And will it work? Probably. Will it do what you want? Maybe. Or maybe not. What if you have plenty of assets and you never need nursing home care? Or what if you need it for a short amount of time? You can’t predict the future. And sometimes I think that creating a plan that’s based on a fear that is not really necessarily a well documented one or thought out one, can lead to bad decisions. You should make these decisions in the clear light of day with trusted advisor and family members and have a thought out plan.

Property Value Appreciation

Madison: Okay. So, how does the appreciation of property value influence the decision to transfer a house to your child versus keeping it until your death?

Mike: Sure. So if there’s a lot of appreciation on your property, your child is better off inheriting it than getting it as a gift. Because when they inherit it, they’ll pay the much smaller inheritance tax on the value instead of income tax on the gain from whatever your cost basis is in the house. So if there’s not much appreciation, maybe it doesn’t matter. But a lot of people have had houses for a long time now have a lot of appreciation in their homes. And it could subject your children to giant taxes, unwittingly and unknowingly.

Long-term Planning

Madison: Yeah, absolutely. So given the unpredictability of future health and financial needs, how can individuals plan effectively for long term care while considering property transfers?

Mike: Yeah, you need to have a thought out plan. You need to talk with real advisors, not like your neighbor over the fence, and try to figure out what makes the most sense for you given your situation. People have all kinds of different situations, and what might be a great idea for you could be terrible for your neighbor. But you need to talk with somebody who actually knows the law and the rules and the taxes and the repercussions. Then think about it. Talk with your loved ones about it, and then make decisions. You know, having the full knowledge of an expert who can guide you through things.

Conclusion

Madison: Okay. All right. So it’s not like it’s impossible to leave your house to your children. It’s doable, but you just have to do it the right way. And it might not be the same as your neighbor next door did.

Mike: Yes. Yes. So it could be that transferring it to your child’s name works in your situation. Right? Maybe you’re going to live in a different house and you’re not worried about that. Maybe it’s best to put it in irrevocable trust. Maybe it’s best to keep it in your name and let your children inherit it. It really depends on your situation and what you’re hoping to achieve. And if you have those thoughts and you combine them with expert advice on what the different legal ramifications are and tax ramifications, then you can make a good decision. Right? It does make sense to get all the information first.

Madison: Absolutely, absolutely, totally agree.

Mike: Thanks Maddie.

Madison: Of course. So I just wanted to add to our listeners, if you are listening to this episode on Apple Podcast or Spotify, and if you have any feedback or questions, please feel free to reach out to us by clicking the send us a text message link in the description. If you have any financial questions, topics you would like us to discuss, or guest recommendations we would love to hear from you. So for more information on Yardley Wealth Management or Yardley Estate Planning, you could visit our website at yardleywealth.net and yardleyestate.net. You can also follow us on socials at Yardley Wealth Management. This podcast has been produced by Madison Demora and Mike Garry with technical and artistic help from Poe Productions.