Passing Your Home to Your Children

By Ronald A. Fatoullah, Esq. and Stacey Meshnick, Esq.

{3:53 minutes to read} Giving your house to your children can have potential tax consequences, but there are ways to accomplish this transfer without the negative side effects. The best method to use will depend on your individual circumstances and needs.

The simplest way to give your house to your children is to name them as beneficiaries in your will. If you are a New York resident, as long as the total value of your estate is under $4,187,500 (until April 2017), no estate taxes will be imposed. In addition, when your children inherit property rather than receive it as a gift during your lifetime, it reduces the capital gains tax liability upon the ultimate sale of the property. Capital gains taxes are paid on the difference between the "basis" in property (purchase price plus capital improvements) and its selling price. If children inherit property, the property's tax basis is "stepped up," which means the basis is increased to the value of the property at the time of death.

For example, if your home is worth $2,000,000 on your death and your children inherit it, they will have a $2,000,000 basis, irrespective of what you paid for it. However, if you were to need Medicaid at any time before you died, the ownership of this home would create eligibility issues.

Another option is to gift the home to your children during your lifetime. For federal estate and gift tax purposes, you can gift a total of $5,450,000 (in 2016) over your lifetime without incurring a gift tax. If your residence is worth less than $5,450,000 and you give it to your children, you likely will not have to pay any gift taxes, but you will still have to file a gift tax return with the Internal Revenue Service for informational purposes.

The downside of gifting property during your lifetime is that it creates capital gains tax consequences for your children. When property is gifted without any retained interest, it does not receive a stepped-up basis, as it would when it is inherited. If you paid $30,000 for your home, your children will take on your $30,000 basis. If they sell the home, they will pay capital gains tax on the difference between $30,000 and the sale price. In addition, gifting a house to your children can have consequences if you apply for Medicaid within five years of the gift.

Another method of transferring property is to put it into a trust that names your children as beneficiaries. With certain types of trusts, the property will no longer be a part of your estate when you die, so your estate will not incur estate taxes. The house will also not be subject to Medicaid estate recovery. With other types of irrevocable trusts, the home will remain a part of your estate but will be out of your name for Medicaid eligibility purposes.

The downside of this alternative is that once the house is in the irrevocable trust, it cannot be taken out again. Although the house can be sold, the proceeds must remain in the trust. Similar to making a gift, if you apply for Medicaid within five years of transferring the house to a trust, you may be subject to a Medicaid penalty period.

Figuring out the best way to pass property to your children will depend on your individual circumstances. Talk to your elder law attorney to decide what method will work best for your family.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick, Esq. is a senior staff attorney at the firm who has chaired the firm's Medicaid department for over 15 years. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.