Many well-meaning elderly clients (and parents of your Boomer clients) consider it a shrewd move to add the names of one or more adult children to the ownership of the older parent's primary residence.
Some even choose to give one or more of the kids ownership of the house outright, while planning on continuing to live in the place for as long as possible.
But the advantages of these strategies are likely far smaller than probably perceived, and the costs and risks far greater. Here's why it's done, how it can go wrong, and some alternate tactics to consider.
Good deeds …
Ostensibly, the motivation many older homeowners have to transfer part or all of the ownership of their home to adult children is to avoid probate, and/or the loss of the value of the home to future nursing home expenses.
Probate can certainly take time and money to complete. Yet according to legal website Nolo.com, probate is usually completed within months after death, not years. And the cost to probate the majority of estates is typically no more than a few thousand dollars.
Completely passing the home on to the kids is usually done with the goal of keeping it out of the “pool” of wealth that must be spent down before the older parent can qualify for public assistance, if she needs to enter a nursing home.
But that widely-held nightmare may be both less probable and less costly than many families fear.
According to Medicare.gov, only about two of every five people who reach age 65 will ever enter a nursing home. And a recent study from the Journal of the American Geriatrics Society found that the average length of stay in a nursing home was just over 13 months.
At a rough figure of $200 per day, that works out to $78,000 — a significant sum, no doubt, but perhaps an amount that could be covered from savings and income, without incurring the risks involved in giving up ownership in the home.
… and punishment
Giving a child partial or full ownership in any asset is just that — a gift. If the value of the gift exceeds the amount of the annual gift tax exemption (for 2011, it's $13,000), an extra set of steps will be required.
First, the act might require the filing of a gift tax return, and at least partial exhaustion of the lifetime gift exemption (currently $5,000,000).
More taxes might also be owed by the heirs later on, since the cost basis for the house may not be able to be “stepped up” at the older parent's death.
If so, and the inheritors choose to eventually sell the asset, they may be liable for a substantial sum in capital gains tax.
The potential cost of a gift or capital gains tax liability may be insignificant, compared to the other possible headaches and heartaches that can occur when giving up ownership in the home to an adult child.
To begin, any ownership the adult child has in the home can be subject to claims of others, including unpaid creditors, the opposing side in a lost lawsuit or bankruptcy proceedings, or the ex-spouse in a divorce.
Unless either the child or the parent has a large amount of other more-liquid assets, these unfortunate events might require the sale of the house. The older parent would then have to find (and pay for) a new place to live.
If the parent has more than one child, the decision over who “gets” the house, and if and when it's sold, can trigger arguments among siblings that live on long after the older parent passes away.
More money from Medicaid?
Even if the older parent eventually enters a nursing home, prior gifting of partial or full ownership in her home may not provide as much financial assistance as expected.
Medicaid eligibility is typically determined by state law, but most states allow the applicant's primary residence to be excluded from the asset calculation.
True, even if the older homeowner qualifies for public assistance while keeping the home, it can eventually be subject to a lien from Medicaid, so that the program can recover funds received from the eventual sale of the house.
But to completely avoid the inclusion of the home in the Medicaid application process, the transfer of ownership has to be completed at least 60 months before applying for public nursing home assistance.
Any application for assistance that happens before the five-year “look back” window expires means that at least a portion of the value of the home may reduce the amount of available aid.
If the older homeowner is concerned only with her home being subject to probate, she can circumvent the process by creating a revocable living trust, and place her home and other assets in the trust.
Upon her death, the assets in the trust can usually be distributed much more quickly and less costly than what probate would otherwise entail.
Those looking to protect their homes from Medicaid scrutiny might require more sophisticated solutions.
Two common Medicaid planning techniques include the use of “life estates” and “remainder interests” to transfer home ownership to the next generation.
Depending on the family's circumstances and state law, the strategies may allow the older parent to achieve many of the benefits of owning the home, and still exclude the value from Medicaid consideration.
Of course, unless you've passed the bar exam along with your Series 7, it's best to contact a qualified attorney to advise your clients on these and other estate planning strategies.
To find one in your (or the client's) area, go to the website of the National Association of Elder Law Attorneys at www.naela.org.
Offering to accompany the clients to the meeting with the attorney can be beneficial to all parties involved. But before you go, visit www.elderlawanswers.com for articles and resources that can help you at least sound like you know what you're talking about.
Kevin McKinley CFP is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid A Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at www.mckinleymoney.com.