submitted by Richard P. Wilson, Esquire
With the high cost of nursing home care, parents are concerned that nothing will be left for their children.
At the average cost of $10,000 per month for care, your savings and investments can be depleted pretty quickly.
A well-meaning friend suggests why don’t you just give your home to them now.
My cousin, Bob, did this and everything worked out well.
It sounds reasonable but there are many potential problems.
Your child can:
- Die before you;
- Can become disabled;
- Can be sued;
- Decide to take out a mortgage to improve the home.
Also, if you have to enter a nursing home, there is a five (5) year look back on any gifts you have made and it may disqualify you from receiving Medicaid benefits for a period of time.
Further, some people may say you can save the inheritance tax by giving the home away now.
Once a year has passed from the date of the gift that is true.
In Pennsylvania the inheritance tax rate for transfer between parents and children is 4-1/2%.
Let’s say you bought your home years ago and the purchase price was $100,000. The home on today’s market will sell for $350,000.
If you give the home to your child now, the tax basis to the child is $100,000 (original purchase price).
So if the child sells the house later there is a $250,000 capital gain tax payable at 15%.
If the child inherited the property on the death of the parent there is only a 4-1/2% tax on $350,000.
There is a tax savings of over $20,000 by paying the inheritance tax rather than the capital gains tax
The best answer is to transfer the home to an irrevocable trust and the parent retains a life interest in the property.
The children receive the home on the parent’s death and pay only 4-1/2% inheritance tax.
When the five (5) year back period has passed, the home is no longer subject to any Medicaid claim.
Thus, any problems that the children have in their lives would not have any effect on the trust.