Are you concerned about losing your home due to a long-term care need?

One of the most significant risks as we age is long-term care. Throughout the years, we have had clients who wanted to protect their homes in the event of an extended long-term care need.

One solution often considered is transferring your home to your children. Before this is done, one needs to consider the unintended consequences and additional risks that may occur.

In the example below, we walk you through a family considering this option. The family has a home, cottage, other equipment, and investment accounts, including IRA accounts of $1,000,000.  The question of transferring the title of their home to their adult children arose.

The following are some of the unintended consequences.

  • Transferring the house does not protect their other assets. The protection of the house will only come into play after they have spent down their liquid assets, including the IRAs. Then the non-liquid assets, such as the home, cottage, equipment, vehicles, etc., will come into play.
  • In a worst-case scenario (if both parents are in a nursing home), they would be spending about $200,000 per year for their care from their investments.  They would have about five years of spending down their IRAs alone before the house would even be considered.  Since the average stay in a nursing home is three years, the transfer potentially would do nothing to protect the home.
  • The house would be subject to the liabilities of their children (bankruptcy, lawsuit, etc.).
  • If the children ran into financial difficulty or were at fault in an accident, the home could be lost even while they are living in it.
  • The house would be an asset to their children and would be included in any divorce agreement.
  • Transfer of title to the house moves the house from a tax-free asset, due to step-up in basis upon either of the parents passing, to taxable as capital gain with no step-up at deaths.
  • Scenario A – Transfer house to children.
    • House value = $500,000 (original cost, plus improvements of $250,000)
    • Husband passes – No step-up.
    • Five years later, wife passes – No step-up.
    • Children sell the house for $750,000
      1. $750,000 sale price – $250,000 basis = $500,000 realized capital gain, split between the children.
      2. Depending on their tax situation, this realized gain could be taxed between 20% and 28% between federal and state taxes.

$500,000 realized capital gain x 28% = $140,000 tax due.

  • Scenario B – No transfer of house
    • House value = $500,000 (original cost, plus improvements of $250,000)
    • Husband passes – Basis steps up to $500,000 current value.
    • Five years later, wife passes – basis steps up to FMV = $750,000.
    • Children inherit the house and sell it for $750,000
      1. $750,000 sale price – $750,000 new basis = $0 realized capital gain = $0 tax due.

Other solutions to consider: These options will effectively transfer their house while maintaining the tax benefits without incurring additional risks but will not protect the home from long-term care costs.

  • Establish a living (revokable) trust and transfer the house and other non-IRA assets into it.
  • Complete a Transfer on Death Deed naming the adult children as direct beneficiaries of the house.

If the situation warrants the transfer of one’s home, most of the above risks could be mitigated through a properly written irrevocable trust.  This option does lose the step-up in basis on the house, and therefore, it needs to be thoroughly analyzed before being implemented.

Most often, one of the best ways to protect your assets from potential long-term care costs is using an insurance option.

If you are concerned about protecting your home and other assets you have spent a lifetime obtaining, schedule a time to have one of our wealth managers provide options to avoid unintended consequences.