In this episode, Tim describes the downsides to transferring a house to adult children while retaining life use, and also suggests an alternative.
Podcast transcript:
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law PC an estate planning probate and elder law firm serving clients throughout central New York. A former school teacher, Tim explains complex legal subjects in an easy-to-understand way. The commentary focuses on the central aspects of estate planning, such as Wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
I'm often asked, should I sign over my house to my kids? The question often comes from folks with adult children who have heard of their friends or neighbors using this strategy, and they want to know whether it's right for them. My answer? Nope, you should not. It's almost never the right thing to do. Here's why. To be clear, I see this all the time. People create a deed that transfers ownership of their house to their adult children and retain life use. They do so in the hope that the house will be protected if they ever need long-term care, like in a nursing home. Or they try using this as a probate avoidance strategy. Technically this could work, but the risks of using this strategy often outweigh the hoped for benefits first. Once you sign over your house to your kids, they really own it, and you do not think about that. The house cannot be sold without their permission, meaning that downsizing or selling for any other reason is out of the question without the kid's consent. Second, even if an adult child would consent to the sale, the adult child might not be able to do so. For example, if that adult child divorced, were sued, had a business failure, became disabled, and needed needs-based government benefits, then that adult child may not have the ability to consent to a sale and turn over all proceeds back to the parent. Third, if the parent goes to a nursing home and the house is sold while the parent is still living, then a portion of the proceeds is lost to the cost of that parent's care. This is because the parent's life estate has an actuarial value, and so that portion of the proceeds must pass to the parent, which typically must then be surrendered to pay for long-term care. Fourth is a tax reason. If the house is sold while the parent is still living, then the adult children who own the property are subject to a capital gains tax that could have otherwise been avoided. Fifth, if an adult child passes away before the parent, then that adult child's ownership of the house passes to that deceased adult child's estate. Although the parent still has life use, it may be in a house that is actually owned by the deceased child's surviving spouse, or even minor children. What a mess. In the end, I understand the lure of transferring a house to adult children as a relatively simple, inexpensive, straightforward way to protect the house from being lost to the cost of long-term care and a way to pass it to kids without probate. However, the downside risks are significant and the loss of control is permanent. Although this may be an effective strategy in certain limited situations, so long as a well-informed client is willing to assume all risks, a better solution is often transferring the house to the right type of trust. Using a trust can offer the same protections against long-term care costs and probate. But it can also allow for control to be retained by the parent, preserve options, and often yields a more favorable tax result.
