The Shifting Sands of Asset Shifting

When you meet the girl of your dreams, you take her home to meet your family. When you’ve been away for a while, you have a homecoming. And as winter sets in, we head home for the holidays. Then why is it that when we get older, our thoughts turn to getting rid of our homes? Perhaps our children have planted that seed or suggested something, or we hear something at a seminar or from a friend or neighbor. Let's take a look at how this issue arises and what the consequences are.

When planning for the possibility that institutional long-term care is in your future, the topics of shielding assets, transferring assets and shifting assets always arise. Among the largest assets that most clients have is a house. So I am often asked about the relative benefits and drawbacks of moving the house out of the name of elderly owners into the names of other members of the family.

There are a number of fact patterns that are presented. One is the married couple with children who simply want to move the house out of their name because they think they are doing themselves and their heirs a favor. Another is the unmarried individual who is widowed or divorced, and who wants to guarantee an inheritance for his or her loved ones. And the third is the person who thinks that by doing this, he will ‘beat the system’ and get to go to the nursing home for free.

Sir Isaac Newton once wrote that “for every action there is an equal and opposite reaction.” It is no different in the law than it is in physics. For every good reason that someone gives you for transferring the ownership of your property out of your name, there is an equally good reason to keep it in your name. Let’s run through a few.

1. One plan people bring to me is they will sell their home to their children for a dollar and rent it back. That is a gift. If the house is worth $100,000, you have made a gift of $99,999 by selling it for one dollar. You will need to prepare and file a gift tax return by the following April 15. There is a cost to that. There probably will not be a gift tax on the gift, but there may be, depending upon other gifts you may have given during your lifetime. And such a gift will have an impact upon your federal estate tax, if any.
    

2. If you dispose of your home, you will lose the opportunity to sell it and take advantage of the once-in-a-lifetime capital gains tax exemption that is available to seniors who sell their homes. Now when your children sell the house, they will have to pay a 15 percent capital gains tax on the sales price minus what you paid for the house several decades ago.
    

3. What if you need the equity from your home to care for yourself in something other than a full-blown nursing care facility? You could have used a home equity loan or a reverse mortgage to pay for someone to come into your home each day and care for you, but now you do not have your home on which to fall back.
    

4. If your spouse is in a nursing home, and you are living in your family residence, the house is an exempt asset and it cannot be taken away by anyone. But if you have given it away, you may have nowhere to live. And if the transfer is recent, such as within five years from the time you applied for Medicaid, the value of the house will be brought into the calculations for what you have to pay.
    

5. The choices of nursing home facilities that will accept you if you knock on their door without money are much smaller than the universe of quality nursing homes. Not every nursing home accepts patients without funds, nor are they required to do so.
    

6. What happens to all of those senior citizen real estate tax and homestead breaks if you do not own the house anymore? Well, they go away, too.
    

7. So now you have consulted with an elder law or estate planning attorney and gotten your real estate properly transferred to the children with the correct documents. What happens if your child gets a divorce, has an income tax issue, gets sued by someone or goes bankrupt? What happens to your home then? There is a genuine risk that the home or a portion of it will be seized or liened by the creditor or the government.

As you can see from these examples, what should be a rather simple transaction can turn into a nightmare if it is not properly planned and executed. Please consult with your friendly neighborhood elder law or estate planning attorney for sound advice and legal counsel.

Sometimes, despite all of the precautions that you take, the plan does not work. Much of the planning done for elderly clients is dependent upon things that are totally out of the control of either the attorney or the client, such as the health of the client. These are shifting sands, and you will need more than flip-flops to navigate them.