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Risks you must consider BEFORE transferring ownership of your home.

 

By Attorney John L. Roberts

illustration of transferring a houseLife Estate or Joint Ownership arrangements might work for some people who want to avoid probate. But don't sign a deed transferring your house unless your eyes are wide open to problems the transfer could cause you, and your family. Consider the risks of life estate and joint ownership, before you decide:

Risk #1: If the house is sold during your lifetime, you may have income tax problems.

The Principal Residence Exclusion is an important tax break that is available to homeowners. Make sure you understand how the exclusion works before you transfer the house to a family member. Transferring a principal residence may disqualify you from part or all of the capital gains tax exclusion on the sale of the residence, and cause unnecessary income tax liability when the residence is sold in the future. If you lose the exclusion and the family decides to sell the house during your lifetime, you could be looking at a capital gains tax on any gain (profit) on the house sale.

example

Couple lost their Principal Residence income tax Exclusion.
My father and I had lunch at his assisted living center with a couple who told us how they couldn't sell their house. The house was worth ten times what they paid in the 1950's. The problem was not that no one wanted to buy the house. The problem was income taxes. They kept a life estate when they deeded the house to their children years earlier, and that terminated their principal residence tax exclusion. To get the exclusion back again, they would have to move back into the house and live there for 2 years. Now if the house is sold before their deaths, the children must pay capital gains taxes on the increased value.

Risk #2: The house value counts against you if you need Medicaid to pay for Nursing Home care within 5 years after the transfer.

Medicaid has a 5 year look back period. With a few exceptions, a house transfer will count as a disqualification if you apply for nursing home coverage within 5 years after you transfer the house.

example

Widow disqualified herself from Medicaid nursing home coverage.
A widow and her children decided she would transfer the house to her children, retaining a life estate. A year later, the widow moved to assisted living, and months after that, she needed nursing home care. The house transfer disaqualified her from the Medicaid coverage she needed to pay the nursing home.

If the widow in this particular example had obtained professinal advice, she might have leaned about Medicaid regulations allowing a caregiver child to get ownership of a parent's house if the parent moves from the house directly to a nursing home.The adult child had lived in her home for more than two years, and took care of her. But the life estate deed cancelled the caregiver exception.


Illistration of bankruptcy judgment

Risk#3: Your child or family member could go into bankruptcy.

If you give joint ownership or a remainder interest in your house to your child or other family member, your house becomes exposed to the financial problems, liens and creditors of all the Joint Owners.

example

Widow pays for her son's bankruptcy.
A widow transferred ownership of her home to her son, retaining a life estate. Years later, the mother moved to assisted living, and she needed the home equity to pay her rent. When it came time to sell the house, the land records showed that her son had gone into bankruptcy. To clear title to the house, the bankruptcy trustee demanded some of the house sale proceeds to pay the son's creditors,

Divorce illustrationRisk #4: Your child or family member could get divorced.

If Mom transfers an ownership interest in her house to her child, and the child has to get divorced, Mom's house is an issue in divorce proceedings, because the child is an owner of the house.

Illustration of liens

Risk #5: Your child or family member could have a serious accident.

If you transfer ownership of your home to a child or family member, and they become responsible for a serious accident, liens can be placed against the house. If the child's insurance does not cover the liability, the victim can place liens and force a sale of the house.  

example

Couple had to undo life estate deed and get their house back from their child.

A couple transferred their home to their adult child, retaining a life estate. Years later, the child had a serious accident, became disabled and needed Medicaid coverage. The child had to return the house to the parents.

Risk # 6: Your child or family member might predecease you.

If you transfer your house to your child, and the child dies, the ownership of the house is part of the child's estate. The problem is even more complicated if the child doesn't have a will, and/or passes with creditors or other liabilities.
example

Life estate deed forces family to probate estate of deceased child.

A widow transferred ownership of her home to her children, retaining a life estate. Years later, one of the children was diagnosed with a terminal illness, and died. The widow's home was now partly owned by the estate of the deceased child. The only way it can be sold or transferred is with a probate court case for the child's estate.


Risk #7: You may decide you don't want to live in the house anymore, but your child won't give the house back to you.

People usually transfer ownership interests in their homes with the thought they will live there for the rest of their lives. Sometimes people change their minds, and realize they would rather live somewhere else that is less expensive, newer, in a warmer climate, closer to friends, or whatever. If the child refuses to transfer ownership back to you, you are at the mercy of the child.

example

Child demands money to release ownership of parents' house.

A couple transferred ownership of their home to their children, retaining a life estate. Years later, one of the children became incarcerated. The parents desired to have ownership of their home returned to them. The child insisted that his parents pay him to sign a deed returning their home.

Risk #8: You may decide you want to fix up the house so that you can keep living here.

Putting a house or any other asset into Joint Ownership of a Life Estate relinquishes control. You give up the right to do what you want with your house. You are required to share management of the asset with the other people who own the house. They might oppose or ignore your requests to make repairs and improvements. This risk can be avoided with a Trust that requires the Trustee to protect your interests. If the house is transferred to a Trust, the Trustee must comply with the directions you write in the Trust document. The Trustee has a fiduciary duty to protect your interests.

Conclusion:

Always consult a professional who can explain the risks and understand your best interests, before you designate beneficiaries, change the ownership of property, or transfer ownership interests to children, relatives or other people. Joint Ownership can cause serious tax consequences and it can expose the entire property to creditors of any of the joint owners. Consider a Living Trust or Asset Protection Trust as alternatives that might give you the flexibility and protection that you want for your home and life savings.