Should Your Aging Parents Put Their House in Your Name?

Updated

For many Americans, the family home contains a lifetime of family members. It is also most people’s most valuable asset.

At the same time, the cost of nursing homes and other end-of-life care options continues to increase. According to Genworth, the annual median cost of a semi-private nursing home room comes in at a median cost of $94,600 per year in 2021, and most people tend to stay well over a year. 

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Given these two realities, it is no wonder that many aging adults and their children consider putting the parents’ home in an adult child’s name. While this may be a good option for some, it can create serious consequences that everyone should be aware of before filing that deed. 

What Can Happen if Your Parents Put Their House in Your Name?

When a parent puts their house in their child’s name, it makes the child the legal owner. Most people do this with thoughts of avoiding going through probate court or protecting the house from creditors. However, doing so can seriously impact their parents’ Medicaid eligibility. Medicaid is the state and federal program that pays for nursing home care for those who meet its qualification criteria.

Medicare and Medicaid explained

It is easy to confuse Medicare and Medicaid because both programs provide medical benefits to the elderly and disabled. However, they do it in very different ways.

Medicare is a federal insurance program that people automatically pay into through their paychecks while they are working. While it is primarily for those over 65, younger people with disabilities can also qualify.

Older adults use Medicare to access their primary care provider and other medical services similar to regular health insurance. They might even pay monthly premiums and copays. But Medicare does not pay for long-term nursing home stays. 

On the other hand, Medicaid is an income-based assistance program jointly funded by the state and federal governments and administered by the states. States determine the details of accessing and using Medicaid benefits, so the rules, benefits, and procedures vary depending on where you live. Medicaid also pays for medical care, but, most importantly, it also covers nursing home care.

Because Medicaid is a need-based program, people must apply to be determined eligible to receive benefits. The threshold for qualifying depends on where you live because some states expanded Medicaid under the Affordable Care Act and others did not.

Even wealthier folks may eventually qualify for Medicaid, but they must first spend down their assets to fall within eligibility guidelines. Completing a Medicaid spend down that complies with your state’s Medicaid guidelines can be challenging – consider consulting an attorney or financial professional to be sure you stay within Medicaid rules.

Look-back period and penalties

Parents often want to leave a legacy behind for their children, so transferring the family home to avoid liquidating it in a spend-down for nursing home bills is understandably appealing. Unfortunately, this must be done well in advance to avoid triggering penalties during the Medicaid look-back period. 

During the look-back period, Medicaid can review financial transactions leading up to the Medicaid application. In 49 states, the look-back period is 60 months (five years), but it is only 30 months in California. 

Any asset transfers below market value during the look-back penalty can lead to penalties by Medicaid. The penalties come in the form of a delay to the start of Medicaid coverage. During that delay, your parent will have to find a different way to pay for assisted living or care. 

Each state calculates the penalty period based on the dollar amount of the transferred assets divided by either the average monthly private patient rate or the daily private patient rate of nursing home care. 

For example, imagine that your parent puts their house valued at $600,000 in your name during the look-back period. If Medicaid determines that it qualifies as a penalty, and nursing home care costs an average of $10,000 per month in your state, your parent would have a penalty of 60 months ($600,000 / $10,000 = 60).

The Medicaid look-back period and spend-down of assets to qualify for Medicaid are complex topics with many exceptions. This is an area where the advice of an elder care attorney who knows your specific situation can be very helpful.

Pros and Cons of Your Parents Putting Their House in Your Name

Unfortunately, there are few reasons to have your parents put their house in your name. The success rate of their house not being included as part of the look-back period can be low if it is not done in advance. As mentioned earlier, your parents would have to start the process at least about five years before making any decisions regarding long-term care. It also depends on your state of residence. 

Medicaid ineligibility is only one of the cons involved with your parent putting their house in your name. There are a few others to consider, both for you and them.

Tax consequences

Many people put their homes in their children’s names with the thought that it will avoid inheritance taxes. In reality, it may just subject their child to more capital gains taxes when they eventually sell the property.

Most people probably don’t have to worry about estate or inheritance taxes. That’s because in 2021, the federal estate tax only applied to estates valued at $11.7 million or more. State inheritance taxes similarly only impact high-value estates, and most have exemptions for surviving spouses and the decedent’s children.

However, capital gains taxes do apply when you sell an asset at a profit, including real estate. For people who earn between $80,000 and $441,450, the capital gains tax rate is 15 percent. 

When parents put their home in their child’s name, it is a gift in the eyes of the IRS. Then, when you sell the property, the capital gains are calculated based on the original cost of the property. 

For example, if your parents bought their house years ago for $100,000 but is now worth $500,000, you will pay capital gains taxes on the difference between $100,000 and the price you eventually sell it for. 

Alternatively, children inherit real estate and pay taxes on a step-up basis. In that scenario, you only pay capital gains on the difference between the value at the time of inheritance and the selling price. In this scenario, that would mean only paying taxes on the difference between the selling price and $500,000. 

The untimely death of an adult child

Even the best-laid plans can be disrupted by unexpected tragedy, but a transfer of your parents’ home can have negative consequences for them if you die before them. It only gets worse if you die without your own estate plan.

Despite your and your parents’ intentions, their house would be part of your estate and eventually pass on to your heirs according to your will or the laws of intestacy. In a worst-case scenario, your heir could even make your parents move out or charge them rent to continue living there. 

How Your Parents Can Put Their House in Your Name

If you and your parents determine that putting their house in your name is a good idea, there are two main ways to proceed. Both involve changing the legal ownership of the house by recording a new deed. 

Transfer by quitclaim deed

Property owners can hand over their property to others via a deed, specifically the quitclaim deed. This type is most often used for informal property transfers between relatives. 

Unlike other deeds that provide an assurance as to the full property interest conveyed, quitclaim deeds only transfer whatever interest the previous owner had. They make no guarantees whether the property is theirs to transfer or whether it is free of liens.

Many online legal forms companies sell blank quitclaim deeds tailored to each state. After completing the deed, it is important to remember to file it with the appropriate agency in your county. 

Add you as a co-owner

If your parents want to retain some form of ownership of the house while still adding you to the deed, one option is to list the asset on their will as a co-owner with the right of survivorship.

People who want to avoid the probate process often own property as joint tenants with the right of survivorship. When people jointly own property, they are all considered to be owners of the whole thing with undivided interests. 

If one owner dies, the remaining owners continue to own the remainder of the property. So if your parents added you as a joint tenant with rights of survivorship, you would become the sole owner when they die.

Common Alternatives for Putting Their House in Your Name

Depending on your parents’ goals, several estate planning options exist that may fulfill the same purpose of transferring their property. These options could help with the added benefit of avoiding the same risks of transferring the property to you.

Create a trust

If your parents are unlikely to need Medicaid benefits in the next five years, placing real estate in a trust may be a good option. The Medicaid look-back period still applies to assets transferred to trusts, so early estate planning can be of help. 

Trusts are commonly used estate planning tools thanks to their flexibility. Property owners can create one during their life and maintain control of it as long as they are living. Trusts can own everything from bank accounts to houses, so they may be able to address multiple estate-planning needs at once. 

Your parents will name a successor trustee to take control of their trust after their deaths. They can also name beneficiaries and provide instructions for distributing the assets in the trust.

File a beneficiary deed

A popular way to transfer real estate upon death outside of probate is through a beneficiary deed, also called a transfer-on-death deed.

A beneficiary deed acts a lot like a payable-on-death designation that you may set up for your bank accounts. It causes the real estate to automatically transfer to the new owner upon the current owner’s death.

People like beneficiary deeds for two main reasons. First, they remove real estate from the probate process. Second, they allow the owner to maintain complete control of the property during their life. The owner may even revoke the beneficiary deed before they die.

Not every state recognizes beneficiary deeds, so double check that they are a viable option for your parents’ property. As with any deed, a beneficiary deed needs to be filed to be effective. A deed would be filed in the county office that handles land records in the county where the property is located.

Obtain a power of attorney, guardianship, or conservatorship

Some children may consider transferring their parents’ home into their own name to properly handle the logistics of a parent who cannot independently manage their own household. From mortgage payments, taxes, and utility bills to arranging for repairs and maintenance, homeownership is a burden. Those tasks can all be even more challenging when someone else’s name is on the account.

Several options exist to help with this problem, depending on your parent’s condition. 

If your parent still has legal capacity, consider asking them to complete a financial power of attorney. A power of attorney can give you the authority to talk to bank representatives, pay bills from their accounts, and more. 

In situations where your parent’s condition has declined, and they lack legal capacity, you can petition the court for the authority to make financial decisions on their behalf. Depending on your state, this may be called guardianship or conservatorship

Regardless of whether you use a power of attorney or become your parent’s guardian, you will be expected to act in your parent’s best interests.

Weigh All Options If Your Parents Want to Put Their House in Your Name

Parents have many reasons for wanting to transfer their house to their children before they die, and there are workarounds to meet most of those goals. When helping your parents create a way to pass on their home, remember to keep the Medicaid look-back rule and your parents’ health in mind. 

If possible, try to start estate planning conversations with your parents while they are still in good health. Not only does it remove concerns about their decision-making abilities, but it also leaves the full selection of estate planning options available to them. 


Sources:
  1. “Cost of Care Survey.” Aging and You, Genworth, 31 January 2022, Genworth.com.
  2. Levine, David and Lisa Esposito. “How to Pay for Nursing Home Costs.” Senior Care, U.S. News and World Report, 15 October 2021, Health.usnews.com.
  3. “Long -term Care Providers and Services Users in the United States, 2015-2016.” Vitals and Statistics, National Center for Health Statistics, February 2019, Cdc.gov.
  4. “Topic No. 409 Capital Gains and Losses.” Tax Topics, Internal Revenue Services, 3 February 2022, Irs.gov.
  5. “What is the difference between Medicare and Medicaid?" Medicare and Medicaid, U.S. Department of Health of Human Services, 2 October 2015, Hhs.gov.

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