Probably not. Parents often think it makes tax and financial sense to transfer ownership. Rarely are they correct. Parents often donate their homes to their children for one or more of the following reasons:
- To remove it from their taxable estate;
- To get the home out of their name for Long Term Care Medicaid purposes; or
- To avoid the home going through probate.
Let's take a closer look at these reasons. While removing donating your home to your children may remove it from your taxable estate when you die, you will likely be requiring your children to pay more capital gains tax when they sell your home. For most families, it does no good to remove the home from your taxable estate because the estate tax exemption is $5.34 million ($10.68 million for married couples who take advantage of estate tax rules for married couples). Since there will be no estate tax, why remove the home from your estate? In addition, when you DONATE your home to your children, they will receive a CARRY-OVER basis. When you let your children INHERIT your home through your Will or Trust, they receive a STEPPED-UP basis. In addition, parents who are looking to downsize and sell their home can exempt $500,000 of gain from tax - if you OWN YOUR HOME when you sell it. So, for tax reasons, it often makes little sense to donate your home.
Parents often donate their home to their children for fear that a nursing home stay will cause the home to be sold and the proceeds spent on long term care. The home is not counted as an assets for Medicaid eligibility purposes, but if the home is in your estate when you die, it may be subject to estate recovery rights by Medicaid. Donating your home to your child causes you to lose control over a subsequent sale of the home, and it renders you ineligible for Medicaid for five years after the donation. Consider transferring your home to a particular type of trust that removes it from your estate but does not cause all the negative tax effects described in the previous paragraph.
Sometimes parents give their home to their kids to keep the home from having to go through the court-supervised probate process which is required when you own assets in your name when you die. Considering the loss of control over your home that results when you give it away, combined with the negative tax consequences of donating your home, you may want to consider transferring your home and other property to a revocable living trust to retain control, retain tax benefits, and eliminate probate.
Donating your home has gift and estate tax effects, capital gains tax effects, property tax effects, Medicaid eligibility and estate recovery consequences, and can put you at the mercy of your children, grandchildren, and their spouses. A poor decision on your part could render you homeless. Make sure you understand the consequences of your actions before you take them. Work with an estate planning attorney with an excellent working knowledge of the practical effects of the property laws, trust code, Medicaid eligibility manual, and the tax code - because there's no place like home.