Holding Court: Give the House to the Kids?
Holding Court is a series by retired Rye City Court Judge Joe Latwin. Latwin retired from the court in December 2022 after thirteen years of service to the City.
What topics do you want addressed by Judge Latwin? Tell us.
By Joe Latwin
Give the house to the kids?
Some people think it might be a good idea to give their home to their kid(s) so that they can qualify for Medicaid. This is fraught with risks. Let’s explore some of them.
Taxes. In addition to giving the kids the house, you may be saddling them with a huge capital gains tax! Say you bought your house a few decades ago for $250,000 and made $50,000 in capital improvements. Your tax basis would be $300,000 (the $250k + the $50k). If the fair market value as of the date of death is $1,800,000 (this is Rye!), you could end up with no capital gain or a $1,500,000 capital gain depending on how the property passes to the kids. If it is a gift, you would have that gain and a capital gains tax of $330,000! (15% minimum federal tax plus 7% NY State tax). Under current law, if it passes by reason of death, the kids would get the house at fair market value and if they sold it for FMV, there would be no gain. If the value at the time the kids sell it went up to $2 million, they would only have a $200k gain and a tax of $44,000. Needless to say, $0 tax beats $330.000 in taxes.
Change in family dynamics. What happens if your kid gets divorced and your former child-in-law now owns some or all of your house? What happens of your unmarried kid decides to run off with a Las Vegas cocktail waitress or a drug addict or worse? What if your kids become impoverished and want or need the proceeds of you house to live?
Liabilities. What if your hedge fund managing kid fails and is subject to multiple lawsuits or hits and seriously injures someone in an accident? Or your kid files for bankruptcy? Your former house could be used to pay off creditors.
Tax credits. Perhaps you have a Veterans, Senior Citizen, or other tax exemption. Your kids may not be eligible for those tax benefits. If it is not the kid’s primary residence, you will not get a STAR exemption either.
Look back period. In general, if a transfer of assets for less than fair market value is found, Medicaid payment for nursing facility care (and some long-term care services) will be withheld for a period of time referred to as the penalty period. The number of months of ineligibility is calculated by dividing the value of the gift by the average monthly cost of nursing home care. You may be disqualified from receiving Medicaid for up to 5 years depending on the value of the house. Assets transferred within 60 months preceding the Medicaid application date are considered for eligibility purposes. However, during your lifetime and as long as you reside in the house, Social Services officials cannot require you to liquidate the house or rent it out.
An outright transfer of your house to some people does not affect Medicaid eligibility. They are: (1) Your spouse; (2) A minor, blind or disabled child; (3) A sibling who has an evidenced equity interest in the home and resided there for at least one year immediately before the date of institutionalization; or (4) An adult child who resided in the home for at least two years immediately before the date of institutionalization.
