Tarhill Photos Inc./Corbis
|
More Than a House
By Karen Hube, May & June 2005
The parents want to make sure their children inherit the family home. Should they act now?
|
More On the Money Columns
Richard and Janine Kaplan's home is more than just a roof over their
heads. It's where the couple raised their three children, and even now it
is the focal point of family gatherings and a haven for their children and
grandchildren. But as the Kaplans get older, they worry that they could lose
their home if either of them ever required round-the-clock medical care and
needed Medicaid assistance. They want it to stay in the family not only for
their kids' financial benefit—the home is valued at about
$575,000—but for sentimental reasons too. Richard's brother, who has
the reputation as the most financially savvy member of the family, has
suggested the couple simply deed the home to their children now.
The Problem
Richard's brother may know a bit about finances, but he's no expert
in estate planning. It's true that transferring your home to your kids can
keep it in the family. (Medicaid doesn't consider your home an asset as
long as it's been out of your name for at least three years before you
apply for Medicaid assistance.) But it's a risky move, says Alexander Bove
Jr., an estate-planning attorney in Boston.
First, parents lose all control over the home and any equity in it.
Furthermore, if one of the kids has a nasty divorce or problems with creditors,
the child could lose ownership and the parents could lose any right to live
there. What's more, putting your home in your children's names is a
lousy move from the kids' tax perspective. Here's why: the kids assume
the parents' cost basis in the property—that's the value of the
home at the time it was purchased plus the cost of improvements. If the kids
sell the house, the difference between the cost basis and the present value
will be subject to capital-gains taxes.
Richard and Janine bought the home for $30,000 and spent $20,000 in
improvements over the years. That means if the home was sold at its current
value, $525,000 of the $575,000 could be subject to capital-gains taxes. In
contrast, if the kids inherit the property upon the death of the last parent,
they get a step-up in cost basis to the value of the property at the time of
death.
The Solution
There is a way, however, for the Kaplans to immediately protect their home:
"They could deed it to their kids and include two special
provisions," Bove says. One provision should indicate they want to
maintain a "joint-life estate," which entitles them to live in the
home for the rest of their lives; the second should be a "special power of
appointment," which indicates that the parents still retain control over
the property and have the power to reappoint a new owner other than themselves
or their creditors at any time, says Bove. Including these provisions
immediately protects the home from a Medicaid lien, though it may affect the
Kaplans' eligibility for full Medicaid benefits for three years.
It's important to note, however, that there's no great urgency for
the Kaplans to do anything. If one of them needs Medicaid assistance, the home
isn't at risk while the healthy spouse continues to live there. The home
becomes at risk only if both of them apply for Medicaid.
But kudos to Richard and Janine for their advance planning. If they get
their affairs in order now, they're being not only healthy and wealthy but
wise too.
Karen Hube is a financial reporter in Westport, Connecticut.
|
