Putting Assets into Children’s Names

Transferring assets into children’s names (a.k.a. gifting) is very effective for Medicaid planning. Once the assets are transferred to another, they are no longer available to the individual and after any applicable penalty periods (five years for nursing home) the individual will qualify for Medicaid.

However, is this a good idea?

Whenever one considers transferring assets out of his or her name, due consideration must be given to the fact that the individual is giving up total ownership and control of such assets. The person to whom the asset is given does not have to give it back and is completely free to do whatever he or she wants with it. For instance, if a parent gives a child her house, the child can turn around and sell the house the next day. Thus, one should think very hard before making such transfers.

But you say, “I trust my children. They would never misuse my money or kick me out of my house.” In fact, many children are trustworthy. However, should one trust their children’s spouses? If a child dies, most probably her estate is going to go to her spouse. Alternatively, the estate will go to that child’s children. If the children are minors, the children’s rights to the funds will be zealously protected by the court. Even if the child does not die, he could get sick, lose his job, get divorced or be forced to declare bankruptcy. All these situations are a threat to the assets that have been given away.  Things happen and even the best-intentioned child cannot control everything that could go wrong.

If one gives away appreciated assets, unintended tax consequences could follow. For instance, Mary buys a house for $200,000 and does not make any improvements to the home. Mary gives the home to her children during her lifetime. After Mary passes, the children sell the home for $500,000. For tax purposes, the children will be treated as though they purchased the home for $200,000 and have a $300,000 profit on the sale of the home. In this scenario, the children could be looking at a capital gains tax bill in the neighborhood of $70,000. If the home had passed upon Mary’s death, this capital gains tax would be eliminated up to the point of her death.

Sometimes parents will transfer their homes and reserve a life estate for themselves. The life estate solves the problem of the parents being dispossessed from their home by their children, the spouses of the children or creditors. However, the parent is still giving up a good part of the value of his or her home and control over it. Let us say the parent wants to sell the home. The parent would need the permission of her children in order to do so. Assuming that permission is given, the home may be sold but the parent is only entitled to that part of the proceeds that represent her life estate. The rest of the proceeds of the sale belong to her children. If the children have not lived in the home for two out of the past five years, they will have to pay a capital gains tax on their share of the sale proceeds.  (However, after the parent’s death, the capital gains tax issue would be the same as though the transferred occurred upon the passing of the parent.)  If the parent wants to mortgage the property, she must also get consent from her children. Thus, even reserving a life estate in the home means giving up some control over it, not to mention possible adverse tax consequences.

Sometimes parents will set up joint accounts with their children. First, this may not protect the account for Medicaid purposes.  Second, this makes the joint account subject to the creditors of their children. Third, there is a presumption that a child who is a joint account holder is entitled to the account upon the death of the parent. It is probably better for a parent who wants a child to be able to manage their account to sign a power of attorney appointing the child as his agent.

Most middle-class people do not have to worry about paying gift or estate taxes. However, if they give more than $15,000, they are required to file a gift tax return.

The discussion of trusts is beyond the scope of this article. However, it should be noted that many of the above problems could be resolved with a properly drawn trust.

In summary, before giving assets to one’s children, due consideration should be given to the loss of control and use of the asset.  Adverse tax consequences could also result.  Before transferring your asset, you should consult with a well-qualified elder law attorney who can guide you through the process.