Transferring Your Home To Your Children
When it comes time to start planning for your future, one of the first steps is to often evaluate your assets along with who will be inheriting your assets. A common choice for most individuals is to appoint family members such as children as direct beneficiaries. In regards to real property, transferring it to your children outright may not be what’s best.Transferring property to your kids can have both advantages and disadvantages. It is important to consider the potential drawbacks before making a decision.
Here are 5 reasons why transferring property to your kids may be a bad idea:
- Tax Implications: Transferring property can trigger significant tax implications, both for you and your children. Depending on the value of the property, you may be subject to gift or estate taxes, and your children may be subject to capital gains taxes when they eventually sell the property.
- Loss of Control: Once you transfer property to your children, you may lose control over how it is used or managed. Your children may decide to sell or rent the property, or make other decisions that you do not agree with.
- Risk of Family Conflict: Transferring property to one child and not others, or giving unequal shares to different children, can create tension and conflict within the family. Even if you intend to be fair, perceptions of unfairness can cause resentment and hurt feelings.
- Financial Risks: If your children are not financially stable, transferring property to them may put them at risk of losing it due to bankruptcy, lawsuits, or other financial difficulties.
- Medicaid Eligibility: If you transfer property to your children and later need long-term care, Medicaid may consider the transfer to be a gift and impose a penalty period before you can qualify for benefits.
While transferring your property to children outright has drawbacks, such as losing control, financial risks, and penalties imposed against individuals making the transfer for the purpose of Medicaid eligibility, there are two ways to transfer real property to your children without losing control of your hard earned assets
Irrevocable Trust & Life Estate
If you or a loved one are looking to protect your assets from creditors or become eligible for Medicaid without having penalties imposed, executing an irrevocable trust and transferring your property into the trust is one option. An irrevocable trust is a type of trust that cannot be modified, changed or revoked after it has been created. Once the grantor (the person who creates the trust) transfers assets into the trust, those assets are no longer considered to be owned by the grantor, and the grantor relinquishes all control over them. The trust allows you to appoint beneficiaries of your choice who can inherit any assets in the trust after your passing, whilst taking the assets out of your control.
After executing your trust, you can now transfer property into your trust by executing a new deed and transfer tax forms. To remain in control of the property while simultaneously transferring the home out of your name, you can execute a life estate deed. A life estate is a legal arrangement that allows someone to use and enjoy a property during their lifetime, after which ownership of the property passes to another person or entity.
The person who holds a life estate is called the life tenant. The life tenant has the right to live in the property, use it, and receive any income it generates, such as rent or dividends, during their lifetime. However, the life tenant cannot sell or transfer ownership of the property, nor can they make any changes to it without the permission of the remainderman, who is the person or entity that will own the property after the life tenant dies.
It's important to note that a life estate is a legal arrangement with long-term implications, so it's important to consult with an attorney before creating one or agreeing to one as a beneficiary.
Revocable Living Trust
If you're looking to simply draft a trust for the purpose of creating an inheritance for your children or other family members, a revocable living trust may be right for you. A revocable living trust, also known as a living trust, is a type of trust that is created during the grantor's lifetime and can be changed or revoked by the grantor at any time. The grantor, who is also typically the trustee of the trust during their lifetime, transfers their assets into the trust and manages the assets as they would if they still owned them directly. A revocable trust will not protect your assets from creditors, but it does give an individual the ability to own their assets while establishing an inheritance that can be changed at any point during the individual’s lifetime.
When transferring a property into a revocable trust, the grantor remains the owner of the home and upon the grantor’s death the assets are transferred to the beneficiaries named in the trust. The main benefit of a revocable trust is assets placed into the trust avoid probate which can be both time consuming and expensive.
Overall, it is important to weigh the potential benefits and drawbacks of transferring property to your children before making a decision. Consulting with an estate planning attorney can help you make an informed decision based on your specific circumstances. The Law Office of Inna Fershteyn has helped countless families create an estate plan that is unique to their circumstances. To contact the Law Office of Inna Fershteyn, please call (718) 333-2394.