There are various reasons that parents may desire to transfer the family home to their children: to avoid Pennsylvania inheritance taxes , to possibly keep a nursing home from being able to eat away the value of the property or to avoid the probate process. While these are all legitimate concerns, the gift transfer of a family home is not a decision to be made lightly.
The family home is an individual’s castle. For many, it is your biggest investment, has a sentimental attachment and is part of your everyday life security. By conveying the property to someone else, you are potentially altering that security blanket and your peace of mind. With that in mind, let us first examine the advantages to transferring real estate to a child.
First, when you make a gift transfer of any property, including your home, to a child or children, you effectively remove that property from your estate. Therefore, the property is not valued in your estate, nor is it part of what is called your “probate estate”. At your death, there is no transfer event. Since the inheritance tax rate in Pennsylvania for children is 4.5% of the date-of-death value, this tax would be avoided as would any probate costs associated with the processing of the real estate. Please note, however, that you must live at least one year beyond the date of the transfer to receive favorable inheritance tax treatment.
Secondly, if you make this transfer now, the Department of Public Welfare may not be able to consider this resource for payment of nursing home care. Gifts made more than 36 months before an individual applies for Medicaid assistance for nursing home purposes are excluded from consideration of payment of that cost. It is also possible to exclude the home from consideration for Medicaid planning purposes even if the transfer is made within the three-year limitation, but that is a subject for a different article.
In the two advantages that I have discussed above, both presuppose that a complete transfer has been made. A complete transfer means that you may not retain a life interest in the property or some type of joint ownership interest. Are there disadvantages to transferring real estate? Are there other concerns? The answer to both is “yes”. Once you transfer your real estate, you give up control. If your child (or perhaps your child’s spouse) decides that it might be time for you to move, you are no longer in control of where you reside. In the event that your child should become involved in a divorce or if your child should die prematurely, your right of occupancy may be jeopardized. These situations may create major difficulties with respect to you peaceably remaining in the property.
You must also realize that when you make a gift transaction, for income tax purposes, the child will assume your tax basis in the property. This can become an important tax issue down the road. For example, if you purchased your home in 1970 for $60,000, and today your home is worth $150,000, then a transfer of the home by gift to your child results in your child assuming your tax basis in the property of $60,000. If your child (who does not reside in the property with you) at some point in the future sells this property for $150,000, your child would pay a capital gain tax on the difference between the sales price and the $60,000 basis. Your child could therefore expend thousands of dollars in capital gain tax that potentially could have been avoided had you simply kept the property in your name. If you retain the property in your name at death and it then passes through your estate, your child would have the advantage of a basis in the property, which would be the property’s date-of-death fair market value. If your child then sold the property shortly after your death, there may be no capital gain tax to pay. There would be, however, an inheritance tax, but the inheritance tax rate is much less than the capital gain rate.
Another concern would be for the potential real estate tax rebates that so many people are accustomed to receiving. These rebates are based on income and on the ownership of real estate. The transfer of the property may then disqualify you from receiving the same. In addition, once you transfer the property to your child, even though you will still reside in the property, a question sometimes arises as to who it is that is responsible for the payment of the insurance, real estate taxes, utility bills, etc., for the property. Is your living there “business as usual” or are you now to be treated as a tenant by your “landlord” child?
There are many other concerns not covered here. So, before leaping ahead with a gift of your home to your child, please evaluate these issues and email a Pennsylvania estate planning lawyer now, or phone us at 724-837-0080 in Greensburg or toll free at 888-534-6016.
For more information please visit our Wills, Estate Planning, Estate Administration and Probate Information page.
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