Issues to Consider Before Gifting Your Home to Your Child

Passing your house on to your children before your death offers some advantages, but there are pitfalls to avoid.

If your children inherit the property through your estate, the cost basis on the property will be the value of the home on the day of your death. But if you gift the children the property while you are still alive, they will inherit your cost basis, including potentially large capital gains if they decide to later sell the home.

You still might want to remove the property from your estate to help you better qualify for assistance with long-term care costs. But be aware that you are subject to a five-year look-back on assets. That means that when you apply for Medicaid, gifts or transfers of assets you make within five years of the date of the application for assistance may be subject to
inclusion in your estate.

If you want to keep living on the property but for estate planning purposes hand ownership over to your children, consider that your child will technically be your landlord. To avoid disagreements, make it clear up front who will be responsible for utilities, maintenance and any associated costs, and any desired renovations or updates along the way. It’s best for you to put these intentions in writing from the start.

Parents who want to stay in the house but no longer include any appreciated value on the home in their estate might want to consider a qualified personal residence trust, or QPRT. This
instrument allows the gifting process to begin while you retain control of the house and still live in it. Typically you would retain the right to live in the house rent-free for a specified period of years (10 is common), after which point the remainder beneficiaries of the trust become fully vested in their interest in the primary residence.

Be aware that an existing mortgage on the property can be problematic. Some mortgage lenders will call in their loans when the property are transferred to others, meaning your child could have to take out a mortgage with an interest rate and other costs that are higher than what you’ve been paying. If your child is allowed to assume your mortgage, he or she needs to be clear on all terms and future costs.