John and Lori had always dreamed of leaving their family a legacy. As they aged, they decided that gifting their home to their children would be the perfect way to achieve this goal. They were excited about the prospect of giving their children the gift of homeownership and avoiding probate.
However, they had no idea of the risks that came with gifting their home. When considering estate planning, many parents explore the option of gifting their homes to their children. While this may seem like a simple and effective solution to transfer assets and avoid probate, there are several risks and drawbacks.
At PJI Law, PLC, our trusted estate planning attorneys in Virginia, are here to answer any questions you may have about the estate planning process. Continue reading as we share the risks of gifting your home to your children and why it may not be the best option for your estate plan.
Contact us at (703) 865-6100 for personalized service and attention.
What is Gifting a Home?
In Virginia, gifting a home involves transferring ownership of the property from the current owner (the parent) to their child or children as a gift. This transfer can be made during the parent’s lifetime or after their death.
Gifting a home can be done through a quitclaim deed or other legal instrument. It can have potential benefits such as avoiding probate, reducing estate taxes, or protecting the property from creditors.
Understanding the Risks of Gifting Your Home to Your Children
While gifting a home may seem like a simple solution, it can have significant risks and drawbacks. Some of the risks to consider before making this decision are below:
Loss of Control
Once you gift your home to your children, you relinquish control over the property. This means your children can make decisions about the property without your input or permission. If you need to sell the property or access its equity in the future, you will need your children’s cooperation.
Example: After gifting their home to their children, an elderly couple needed to access the equity in their home to pay for medical expenses. However, their children refused to sell the property, leaving the couple without the needed resources.
Gifting your home can have significant tax implications, including gift and capital gains taxes. If you gift your home to your children while still alive, you may be subject to gift taxes if the home’s value exceeds the annual gift tax exclusion.
Additionally, if your children sell the property in the future, they may be subject to capital gains taxes on the appreciated value of the property.
Example: A woman gifted her home to her children while still alive, not realizing that the home’s value exceeded the annual gift tax exclusion. As a result, she was subject to gift taxes on the excess value, reducing the overall value of the gift.
Gifting your home can also impact your eligibility for Medicaid. If you or your spouse require long-term care and seek Medicaid assistance, transferring your home may disqualify you from receiving benefits.
This is because Medicaid has a five-year “look-back” period, which means that any assets transferred within five years of applying for benefits are subject to a penalty.
Example: An elderly man gifted his home to his daughter, not realizing that the home’s value would impact his eligibility for Medicaid. When he needed to enter a nursing home, he was denied benefits because the value of the gifted home was considered a countable asset.
Creditors and Lawsuits
Once you gift your home to your children, it becomes an asset subject to their creditors and potential lawsuits. The gifted home may be at risk if your children experience financial difficulties, divorce, or legal issues.
Example: A couple gifted their home to their children, but one of their children experienced financial difficulties and was sued by creditors. As a result, the gifted home was at risk of being seized to satisfy the outstanding debts.
Even if you have a trusting relationship with your adult child, life is unpredictable, and gifting your home to them can lead to unforeseen consequences. If you continue to live in the family home after transferring the title, you legally become your child’s tenant, which can lead to disagreements over property maintenance or a future sale.
Additionally, changes in family dynamics may cause you to regret your decision to transfer the property to your child’s name.
Example: A couple gifted their son their home but continued living there. Disagreements over property maintenance arose, causing tension. When their health declined, they realized they were vulnerable and regretted not fully considering the potential consequences.
Alternative Estate Planning Strategies
There are several alternatives to gifting a home that can achieve similar goals without the associated risks. Some options to consider include:
A trust is a legal arrangement where you transfer ownership of your assets to a trustee who manages them for the benefit of the beneficiaries. By creating a trust, you can transfer ownership of your home to the trust and name your children as beneficiaries.
This allows you to maintain control over your home while providing for your children’s future. Your local trust attorneys can advise you on which type of trust is best for you.
A life estate is a form of joint ownership that allows you to continue living in the home until your death, at which point it is transferred to the other owner. Life estates can be used to avoid probate and give a home to children without relinquishing the right to occupy it.
In addition, they can play a significant role in Medicaid planning. However, this can create complications if you want to sell or lease the home at some point in the future.
A transfer-on-death deed is a legal document that transfers ownership of the home to your children upon your death. This allows you to maintain control over the home during your lifetime while still ensuring that your children receive it after your death.
Sell the Home
Finally, selling your home and using the proceeds to fund your retirement or estate plan can be an effective way to transfer assets and minimize potential risks and tax implications.
How a Virginia Estate Planning Attorney Can Assist You in Avoiding Probate Without Retitling Your Home
Putting your family home and other assets in a trust is the simplest way to keep them out of probate. You can keep full control of your assets and use or sell them as you normally would by establishing a revocable living trust. After your death, a successor trustee will manage the trust and distribute assets to beneficiaries.
Another option is to place your home in an irrevocable trust to protect it from creditors and Medicaid claims. An irrevocable trust, on the other hand, is a less flexible solution that restricts your use of the property. You can read more about trusts in a blog we wrote here.
Your local trust attorneys in Virginia can provide dependable legal counsel and establish a trust to meet your estate planning needs.
Frequently Asked Questions
Q: Are there any specific tax implications if the parents gift their home to multiple children?
A: Yes, there can be. Each child may be subject to gift tax on their portion of the home’s value. Additionally, if the home is sold, each child may be responsible for paying capital gains taxes on their portion of the increase in value since the transfer.
Q: How does gifting a home to children affect the parents’ mortgage or other liens on the property?
A: Gifting a home does not automatically remove any liens on the property, and it may even trigger the need to pay the entire mortgage balance. The parents will still be responsible for paying any outstanding debts or liens on the property after the transfer.
Q: Are there any specific legal requirements that need to be met when gifting a home to children?
A: Yes, there are. The transfer of ownership must be properly executed, recorded, and comply with state and federal law to be valid.
Q: Can parents revoke the transfer of their home to their children if circumstances change?
A: It depends on the specific circumstances and the terms of the transfer. In some cases, it may be possible to revoke the transfer, but in other cases, it may not be possible.
Q: What happens to the gifted home if the child passes away before the parents?
A: The property will become part of the child’s estate. The distribution of the property will then depend on whether the child had a valid will at the time of their death. If there were no will, the property would be distributed according to Virginia’s intestacy laws.
Q: Can gifting a home to children affect their own estate planning goals and strategies?
A: Yes, it can. Receiving a gifted home can affect the children’s overall estate plan and may require adjustments to their own goals and strategies.
Secure Your Family’s Future by Consulting with Trusted Estate Planning Attorneys Before Gifting Your Home to Your Children
If you’re considering gifting your home to your children, you need to carefully consider all potential risks and consequences before making any decisions. Consulting with trusted estate planning attorneys from PJI Law, PLC, can help you determine the best strategy for your individual circumstances to ensure your wishes are carried out in the most effective and efficient manner possible.
Don’t let the fear of probate or estate taxes drive you to make hasty decisions that could cause family conflicts or financial instability. Take control of your estate planning today and secure your family’s future for years to come.
If you need assistance getting started or have questions about any part of the process, please don’t hesitate to call us to speak with a member of our Virginia estate planning attorney team. At PJI Law, PLC, each client receives our complete dedication, personal attention, and courteous, white-glove service.
Call our office at (703) 865-6100, or complete our online form to schedule your consultation with our Fairfax, Virginia, estate planning legal team. We provide a full range of estate planning services to protect your family and your legacy by ensuring the seamless transfer of your assets.
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The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country, or other appropriate licensing jurisdiction.