The Risks of Gifting a Home
If your parents are actively considering the best way to protect your inheritance, they’re already a step ahead of most Arkansans: statistics suggest that an unfortunate majority of Americans have yet to write a will, let alone consider how they might pass on a family home.
When people begin planning their estate, their biggest concern is often protecting property from the perils of probate proceedings. Adding your name to a home title so that you might retain ownership once your parents pass away is a particularly easy way to keep a house out of probate.
However, life has a habit of making simple arrangements unexpectedly complex. Gifting a home to an adult child could present problems if:
- The parents are on or applying for Medicaid. Parents often wish to gift their homes when they are approaching retirement age. While Medicaid benefits can help pay for health care costs and nursing home fees, the federal government could still penalize parents for gifting a home. This is because Medicaid looks at all transfers and gifts made within five years of application. If they gift a home, they may not be able to receive Medicaid coverage for years.
- The child gets into an accident. If the heir gets into a car crash or ever requires expensive medical treatment, the home’s ownership could be threatened by costly medical bills.
- The child accrues debt or other financial liabilities. If the heir faces any unexpected financial difficulties, creditors could stake an interest in the property—costing the child their inheritance and forcing the parents out of the home.
- The child hasn’t planned for taxes. Gifting a home can complicate tax planning. If parents add a child’s name to the home title, the child might not have to pay any significant capital gains tax—however, the home could be jeopardized by any liabilities accrued later. Some parents try to reduce risk by listing their home in a will. Unfortunately, gifting a property through a will might mean that the home’s market value is appraised at current rates once ownership transfers. The heir could be subjected to costly capital gains taxes on the difference between the home’s current tax basis and the revised market-rate basis. In other words, parents’ well-intended “gift” could end up costing their children tens of thousands of dollars in unplanned capital gains taxes.
Strategies for Passing Down a Family Home
While gifting a property could create unnecessary trouble, your family may have other, better options to transfer a home. Your parents could:
- Give you a cash gift. Your parents could sell the home and then gift you the cash proceeds. Depending on your property’s value, the gift could be exempt from capital gains taxes and other wealth transfer levies. A cash gift would also help you and your family avoid any liability-related issues or disputes.
- Arrange a gift-by-sale. Instead of transferring possession to you outright, your parents could sell you the property. You would acquire your own financing to purchase the property at market price, then begin making mortgage payments. Your parents could then avail the Internal Revenue Service’s $13,000-per-year gift exemption to assist or even cover your monthly mortgage payments.
- Establish a revocable living trust. An Arkansas estate planning attorney could help your parents establish a revocable living trust, a legal arrangement that lets them transfer the home’s title to the control of a trust that they create and retain a life-long interest in. Your parents will be able to control and access the trust assets as long as they are alive and continue living in the home. Once they pass away, you become trust beneficiaries and can receive the home outside of probate.
How a Professional Can Help
Your parents’ ideal strategy for transferring a home to a child is very much dependent on the unique characteristics of their:
- Home’s value
- Estate’s net worth
- Long-term goals
- Retirement plans
Your family’s estate plan must account not only for the totality of your assets but your current values, goals, and dreams. No two families should ever have the exact same estate plan because no two families are exactly alike.
Your family—and your home—deserve a solution that’s custom-made for you. Quraishi Law & Wealth could help you create an estate and wealth management plan that protects your assets now while keeping them safe for your children. Send us a message online today or call us at 870-275-4304 to schedule your initial consultation.