When you and your elderly parents are trying to figure out a plan to distribute their assets, one of the most valuable assets is their house.
Signing over the ownership of a house has potential tax implications that will affect both the parent and recipient.
Whether your elderly parent should sign over their house can be complex. The factors to consider are your parents’ eligibility for Medicaid, the remaining mortgage, any increase in their home’s value over time, and more.
This article will help you answer that question better and cover the pros and cons of signing over a house.
Key Takeaways
Signing over your parents’ house into your name can have several tax implications. You may be subject to pay capital gains tax, where you will be responsible for any increase in the value of your parents’ home.
There are situations where your parents’ house is not considered in their Medicaid eligibility. However, if they transfer ownership of their house anytime within the five years before they apply for Medicaid, their benefits may be delayed severely.
The most common way to transfer house ownership is through a quitclaim, gift, or beneficiary deed. However, you and your parents can also consider creating a trust or power of attorney as alternatives.
Should Elderly Parents Sign Over House?
When deciding whether your parents should sign over their house, there are several factors to consider.
The transfer of ownership could provide you and your parents with tax benefits, depending on your situation.
However, this is only true for some, and sometimes the transfer of ownership will cost you a large sum.
Here are some things to consider before signing over your home:
Tax Implications
The tax implications of signing over a house are essential to know. The taxes that affect the transfer are capital gains tax. Capital gains tax is applied to any value difference between when a child receives ownership and when the house is sold.
Many elderly parents bought their house long ago, and the property value has likely increased over time. This increase in value is subject to capital gains tax.
Capital gains tax is applied differently depending on how you assume ownership. If your parent signs over ownership while still alive, you will be liable for the difference in value from the original purchasing price.
However, if you inherit the house through a will or trust, you are only responsible for the difference in the selling price and the value at the time of inheritance.
The difference in tax liability can be massive in these situations. To avoid assuming a huge tax responsibility after receiving the house, you should thoroughly investigate any increase in the value of your parents’ home.
Probate
Probate court is the legal process to distribute somebody’s assets after passing. Many people want to avoid the complex and expensive probate court procedures, but the process may be more straightforward than you think.
Sometimes families try to avoid probate court out of fear of this process, but the complexities and expenses of probate court vary depending on where you live.
In reality, only a few states have complex and expensive procedures. For this reason, you should research your state’s specific probate laws before deciding to sign over your parents’ house.
If you live in a state with expensive or complex procedures, there are ways to skip the probate process and avoid more severe capital gains taxes.
For instance, a trust will allow you to skip the probate procedures and expenses by assigning the distribution of assets to a trustee. A trust also has potential benefits and is an appealing option for many.
Death of the Adult Child
Another unforeseeable circ*mstance that can affect the transfer of ownership is the unexpected passing of the child after inheriting the house.
The house will legally belong to the child and be considered their asset.
In this case, the ownership of the house will be passed down to the child’s heirs. The probate court will decide the distribution of the child’s assets under that specific state’s intestacy laws.
Without control over the house, it may be passed down to irresponsible children or taken out of the family’s possession entirely, depending on debt or other situational factors.
Related Article: Helping Elderly Parents - The Complete Guide
Does Your Elderly Parent Keeping Their Home Effect Medicaid Eligibility?
One of the most common reasons you and your parents may think to sign over their house is to help them qualify for Medicaid.
Medicaid eligibility is determined by the monetary value of assets an individual has. Since a home is one of a person's most considerable assets, you might think that transferring the ownership will decrease your parent’s assets enough to qualify.
However, this is only sometimes true. There are situations when your parent’s home may not qualify as an asset in consideration for Medicaid. There are also reasons why transferring ownership of your parents’ home can negatively affect their eligibility.
If you or another dependent of your parent still lives in the house, it typically will be excluded from the consideration for Medicaid eligibility. In this instance, your parent may keep their house and still potentially qualify for Medicaid.
Another critical factor is the five-year lookback period applied to any uncompensated transfers or gifts your parents give. This rule means that in the five years before submitting a Medicaid application, any uncompensated transfers or gifts your parents gave can delay receiving Medicaid benefits.
If your parent transfers home ownership during this lookback period, Medicaid may consider it a gift and will delay your parents’ benefits. If the house is valued at $300,000 and your parent requires $5000 a month in assistance, the delay will be 60 months (300,000/5000).
For this reason, it is essential to consider how signing over ownership of your parent’s house may affect their eligibility.
Related: Selling Elderly Parents Home: How To Do It + Mistakes To Avoid
How Can An Elderly Parent Sign Over House?
If you decide that signing over ownership of your parent’s house is the best idea, knowing all the necessary steps is important. There are several ways to sign over ownership of the house to an adult child, but the most common is using deeds.
The three most common types of deeds used are:
1. Quitclaim Deed
A quitclaim deed gives the least responsibility to the receiver of the house.
You and your parent will sign the deed with an attorney present. Then the deed will be filed with your local county’s office and dictate the transfer of ownership of the home.
A quitclaim deed assures there are no liens held on the property and holds the parent responsible for any remaining mortgage payments.
2. Gift Deed
A gift deed frames the ownership of the house as a gift the parent gives the child.
Both parties must sign the deed, and there is no exchange of money or compensation.
In this case, the child will be held liable for gift taxes and may be subject to capital gains if the property has increased in value.
3. Transfer on Death Deed
A transfer on a death deed signifies that the ownership of the house won’t be given to the child until the parent passes away.
A transfer on the death deed can help the child avoid probate court and some of the tax liabilities that may result from a gift deed.
All of these legal documents will require a lot of legal paperwork you must organize. That’s where Trustworthy comes in - we can help you keep all your important documents in one place, hassle-free.
Alternative To Signing Over A House
There are alternatives to signing over the house that may suit you and your parents better, depending on your situation.
These options may help you avoid extra taxes and other risks in transferring ownership of your parent’s house.
Trust
A trust is a legal agreement that names a trustee responsible for distributing your parents’ assets upon their passing away. Trusts are commonly used as an alternative to wills by people who wish to avoid probate courts and keep estate planning more in-family.
A trust can contain your parents’ assets, including their house, and will dictate which beneficiary will receive what asset. Trusts can save your family money and challenges in the future.
However, the downside to a trust is that the assets transferred to it will still be considered in the five-year look-back period when your parents’ Medicaid eligibility is decided. For this reason, it is best to use a trust if your parents don’t require Medicaid or do it at least five years before you apply.
Power of Attorney
Another alternative is to acquire a power of attorney, allowing you to manage and handle your parents’ assets when they no longer can.
If you are considering transferring the ownership of your parent’s house because they can no longer manage it themselves, this is another option to consider.
After you and your parents complete a power of attorney, you can legally pay their bills from their accounts, sort out their finances, and manage their house for them.
This will give you more responsibility, and you will be legally required to do the best for your parents. A power of attorney can be an excellent alternative to eliminate the risk of tax liability or losing Medicaid eligibility.
Related: Can A Power of Attorney Sell A House Before Death?
Frequently Asked Questions
Can my parents put me on the deed to their house?
Your parents can put your name on the deed to their house. Many people might see this as a simple method of estate planning.
However, it may be a bad idea. Depending on the type of deed, your and your parents' finances, and other factors, this could subject you to tax liability and affect your parents' Medicaid eligibility.
Can my parents just give me their house?
Your parents can give their house to you if they have complete ownership. They can transfer ownership to you as a gift, where they receive no compensation in return. You may be subject to gift taxes if the house's value exceeds a certain amount.
Is it better to inherit a house or receive it as a gift?
The better option depends on you and your parents' specific situation, but typically inheriting a house can allow you to avoid most taxes for capital gains. If your parents transfer the house to you while they’re still alive, you may be held responsible for paying for any increase in the house's value.
What are the disadvantages of putting your house in a trust?
Putting your house in a trust does not exclude you from estate taxes or any outstanding debts involved with the property. This means your beneficiaries may be held responsible for your debts. Transferring your house into a trust will also be included in Medicaid's five-year look-back period when determining your eligibility.
What happens when you inherit a house from your parents?
If you inherit your parents' house through a will, you must complete the probate process and pay all the necessary fees. You can also inherit their house through a trust or a beneficiary deed. This can help you avoid the probate process and additional costs.
