People like to try to solve problems in a simple manner, but like do-it-yourself dentistry, things that sound like simple solutions to estate planning situations could lead to problems.
People who own their own homes, especially when the mortgage is paid off, often think they should add their adult child or children to the deed so the asset passes to their heir(s) without going through probate. However, this seemingly simple step could lead to a few issues, one of which is making you ineligible for Medicaid for a period of time. That’s just for starters, as reported in a recent article from nj.com, “The risks of changing your home's deed.”
If the home has unrealized capital gains when he passes away, only his half of the value of the home would be eligible for a step-up in basis. If a senior goes ahead and sells the home while he’s still alive, he can exclude up to $250,000 of capital gains from tax, if it was his primary residence in two of the five years directly preceding the year it was sold.
However, if the daughter lives out of state, adding her to the deed will mean that her half won't be eligible for the exclusion because her primary residence is in another state.
In addition, if the daughter has creditors to whom she owes money, those creditors could attach a lien to her half of the senior’s home.
One other thought is whether the senior owns other assets or has long-term care insurance or other resources to pay for long-term care, should it become necessary.
If the senior in our scenario transfers half of his home to the daughter, it could be an issue if he needs long-term care and needs to qualify for Medicaid. Medicaid has a five-year lookback to determine if you gave assets away within five years of your application for benefits. Transferring the home could make the widow here ineligible for a time.
This sort of decision is best made with the guidance of an experienced elder law attorney who can address the specific circumstances and make sure that all parties concerned understand the implications of the decision. It could be costly for you or your heirs, so you’ll want to be fully informed.
Reference: nj.com (January 29, 2018) “The risks of changing your home's deed”