9 Risks You Must Consider Before Transferring Your House to Joint Ownership or Life Estate with Your Children
Life Estate or Joint Ownership arrangements do 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 the possible problems that the transfer could cause you and your family in the future. An Asset Protection Trust or a Living Trust could provide you with the flexibility and protection that you want for your home and life savings. Consider these true stories, and risks of life estate or 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.
Risk #2: The entire 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. The house transfer counts as a disqualification if you apply for nursing home coverage within 5 years after you transfer the hose.
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 will then be exposed to the liens and creditors of all the Joint Owners. Example: Mary Smith decided to transfer ownership of her house to her adult child. Unfortunately, the child had financial problems and he filed Bankruptcy. Mary's house and bank accounts became an asset in the child's Bankruptcy case, and money had to be paid to the Bankruptcy Trustee to clear title to the house.
Risk #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, the house be cam es another issue in the divorce proceedings, because the child is an owner of the house.
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 to a serious accident, liens can be placed against the house. If the child's insurance does not cover the liability, the victim can move to execute the liens and force a recovery from sale of the house.
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 more complicated if the child doesn't have a will, or passes with creditors or other liabilities.
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.
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. On the other hand, 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.
Risk #9: 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.