Transferring assets to your children
May 2017 | Irina A. Karlova, Esq.As an elder law and estate planning practitioner, I often have clients asking why they can’t transfer their assets to their children since they will “get their estate anyway.” Many of my clients are retired individuals or couples who own their homes outright and have some investments or savings in their names.
They are worried they will outlive their money and come to my office seeking legal advice about protecting their assets in case they require long-term care in the future.
Since paying privately for long-term care or purchasing a long-term care insurance policy might be costly or not an option for some of them, many of them look into Medicaid planning.
Medicaid is a joint federal and state program that covers a range of medical services for eligible individuals. The services include homecare along with care at a skilled nursing facility.
The eligibility rules for Medicaid are strict with income and resource limits. There is also a penalty for transferring assets within the five-year look-back for Medicaid nursing home coverage.
In order to qualify for Medicaid when long-term care is needed in the future, an individual seeking such coverage must remove excess resources from his/her name prior to applying for Medicaid.
Should you transfer your assets?
Although there are a few ways to shelter your assets, we’re going to focus on why transferring your assets to your children, grandchildren or other family members or loved ones outright might be an issue and could potentially create problems for you.
Once an asset is transferred to another person, it becomes that person’s asset for everybody else in the outside world. A “trusted” child or loved one, or even their spouse or domestic partner, might have creditors, file for bankruptcy, could be sued by a business partner or by a party in an automobile accident.
All these things are beyond our control and could happen to anyone. I worked on a case where an elderly gentleman was in need of placement in a skilled nursing facility.
Years ago, he transferred the ownership of his home to his children retaining a Life Estate for himself (a Life Estate is the lifetime right to use and occupy the property).
Our office was hired to prepare an institutional Medicaid application on his behalf. As the home was now vacant, the family decided to sell it when they encountered a problem.
A lien had been placed on the home by the IRS because a spouse of one of the children to whom the gentleman transferred the property owed back taxes. Resolving issues like this can take significant amount of time and money and could require hiring additional attorneys.
Fortunately, there was a happy ending to the story. The family of the client, with the help of elder law and real estate attorneys from our office, was able to work out a payment plan with the IRS (this took almost a year), remove the lien from the property and sell it.
We subsequently filed a Medicaid application on behalf of our client and obtained nursing home coverage for him. One can only imagine what this family had to go through. All of this could have been avoided if he had simply consulted a qualified elder law attorney prior to transferring the house to his children.
An outright transfer cannot be reversed if the relationship with the children or other family members deteriorates. Once the money or any other property is out of your name, you lose control – and not everyone is comfortable with that.
Your assets may become subject to a matrimonial action if your children file for a divorce. If they do, the results may not be what you would have wanted. The child to whom you transfer your assets could intentionally or unintentionally co-mingle “your” money with their money. Your child depositing your assets into their joint bank account with their spouse or adding their spouse’s name to the bank account you transferred to them can create a “marital asset.” Marital assets can be subject to equitable distribution in a divorce proceeding.
Your assets can pass to your son-in-law or daughter-in-law if your child predeceases you. Quite often, we find the “younger generation” does not have even the basic estate planning documents in place. Without the correct legal documents, assets that you transferred to your child will go to your child’s beneficiaries – which may not necessarily be the beneficiaries you intended.
The negative tax consequences of the outright transfer of the highly appreciated assets, such as stocks or real estate, should not be overlooked. Significant capital gains tax consequences can result when these assets are later sold by the children.
Some of these adverse tax consequences could have been avoided with proper planning. Other tax consequences can occur as well, such as an increase in real estate property taxes or the loss of real estate tax exemptions.
Many seniors enjoy certain real estate tax exemptions (such as STAR, enhanced STAR or veterans’ exemptions) that could be lost once you change the ownership of your primary residence to your children.
In addition, while seniors would like to see their grandchildren go to college, they often neglect the fact that transferring their assets to their children “disqualifies” their grandchildren from certain scholarships and financial aid. When a child is applying for most financial aid programs, the parents must report ALL of their assets and income generated by their assets.
Life can be unpredictable. A child or spouse of a child could become ill, disabled, lose their job and become unable to afford medical insurance, or may require public assistance such as Medicaid. Owning your assets in their names will make them ineligible for public benefits they otherwise might be entitled to.
So what is the alternative? Is there any way the assets could be protected? A properly drafted irrevocable asset protection trust (i.e., “Medicaid irrevocable trust” or “Medicaid income only irrevocable trust”) is a popular planning tool among elder law practitioners. Not only can this trust protect your assets for Medicaid purposes, subject to certain eligibility and transfer penalty rules, it will keep your assets out of the financial problems your children might have.
This trust can help you to preserve all the property tax exemptions that you are entitled to on your primary residence, and help minimize or possibly avoid capital gain taxes if the assets pass from the trust to your beneficiaries upon your demise. Any assets that you place into that trust are not considered your children’s assets as long as they are owned by the trust.
Another benefit of that trust is that you, as a trust creator, can retain the authority to change the death beneficiaries of your trust. In other words, if you have a falling out with your children for some reason, you can alter the distribution of the assets in the trust to remove them as beneficiaries.
Every family is different and every case is unique. There are certain situations when an outright transfer is appropriate and sometimes is the only solution to the problem.
That is why it is advisable for seniors interested in protecting their assets to seek the advice of an experienced elder law attorney who can create a plan based on the specific goals and objectives of the family, family dynamic, family’s lifestyle and the type of assets involved.