Often parents will transfer the ownership of their home to a child in order to avoid probate or as a tax play. There are several risks in doing this, and at the end of the day it may not help you accomplish what you wanted to begin with. Some cautions are relatively obvious, for example your child could sell your home without your permission, or default on the loan, introducing the risk of creditors reclaiming it. But for all those who are saying "my kid would never..." read on for some other instances that may not be so obvious.
- If a child becomes divorced, the ex may have a legitmate claim on your home
- The transfer of your home does not make you automatically qualify for Medicaid--they have a 5-year lookback for property and asset transfers
- Taxes are likely to be far less if a home is part of a normal inheritance, since the cost basis will be predicated on when it is inherited, not when it was transferred, reducing the likelihood of capital gains
- You won't have the option of a reverse mortgage, should you ever need to borrow against it
If transferring your home brings your estate below the estate tax level, then it could very well be a sound financial decision for you and your heirs, however there are ways to protect yourself. Ask an estate attorney about how you can get the benefits without the risk with the following solutions:
- A "life estate" where fair market rent is paid to the child to avoid retained interest in the house.
- A QPRT (here we go again with the acronyms) is another option. It is a Qualified Personal Residence Trust, which allows for transfer at a discount with the agreement to allow parents to remain in the house.
- A "defective grantor trust" that you gift or sell the home to, freezing its value at the time of transfer while immediately reducing the value of the estate.
Source: Wall Street Journal