Solution Law Firm Blog

Why Transferring Ownership of Your Home To Your Child Is A Bad Idea

by | May 9, 2022 | Estate Planning

Whether it’s to qualify for Medicaid, avoid probate, or reduce your tax burden, transferring ownership of your home to your adult child during your lifetime may seem like a smart move. But in nearly all cases, it’s actually a huge mistake, which can lead to dire consequences for everyone involved.

With this in mind, before you sign over the title to your family’s beloved homestead, consider the following potential risks. 

Your Eligibility For Medicaid Could Be Jeopardized

With the cost of long-term care skyrocketing, you may be worried about your (or your senior parents’) ability to pay for lengthy stays in an assisted-living facility or a nursing home. Such care can be extremely expensive, with the potential to overwhelm even those families with substantial wealth.

Since neither traditional health insurance nor Medicare will pay for all long-term care you may need, you may look to Medicaid to help cover the costs of long-term care. To become eligible for Medicaid, however, you must first exhaust nearly every penny of your savings.

In light of this requirement, you may have heard that if you transfer your house to your adult children, you can avoid selling the home if you need to qualify for Medicaid. You may think transferring ownership of the house will help your eligibility for benefits, and this strategy may seem easier and less expensive than passing on your home (and other assets) through estate planning.

However, this tactic is a big mistake on several levels. It can not only delay—or even disqualify—your Medicaid eligibility, it can also lead to other serious problems. Here’s why: In February 2006, Congress passed the Deficit Reduction Act, which included a number of provisions aimed at reducing Medicaid abuse.

One of these provisions was a five-year “look-back” period for eligibility. This means that before you can qualify for Medicaid, your finances will be reviewed for any “uncompensated transfers” of your assets within the five years preceding your application. If such transfers are discovered, it can result in a penalty period that will delay your eligibility. Any transfers made beyond that five-year window will not be penalized.

The length of the penalty period is calculated by dividing the amount of the uncompensated transfer by the average cost of one month of private nursing home care in the state you live in. These days, the average cost of nursing home care is roughly $10,000 a month. Given these figures, this means that for every $10,000 worth of uncompensated transfers made within the five-year window, your Medicaid benefits will be delayed for one month. So if you transferred the title to a home worth $500,000 within the look-back period, your Medicaid benefits would be delayed for 50 months.

In light of this, if you transfer your house to your children and then need long-term care within five years, it could significantly delay your qualification for Medicaid benefits—and possibly even prevent you from ever qualifying. Rather than taking such a risk, consult with us to discuss safer and more efficient options to help cover the rising cost of long-term care, such as purchasing long-term care insurance.

Your Home Could Be Vulnerable To Debt, Divorce, Disability, & Death

There are a number of other reasons why transferring ownership of your house to your child is a bad idea. If your child takes ownership of your home and has significant debt, for example, his or her creditors can make claims against the property to recoup what they’re owed, potentially forcing your child to sell the home to pay those debts.

Divorce is another potentially thorny issue. If your child goes through a divorce while the house is in his or her name, the home may be considered marital property. Depending on the outcome of the divorce, the settlement decree may force your child to sell the home or pay his or her ex spouse a share of the home’s value.

The disability or death of your child can also lead to trouble. If your child becomes disabled and seeks Medicaid or other government benefits, having the home in his or her name could compromise their eligibility, just like it would your own. And if your child dies before you and owns the house, the property could be considered part of your child’s estate and end up being passed on to your child’s heirs, leaving you homeless.

There’s Simply No Substitute For Proper Estate Planning

There are other risks involved as well that we have not gone into in this article but we would be happy to discuss with you.

Given the potential risks, transferring ownership of your home to your adult child as a means of “poor-man’s estate planning” is almost never a good idea. Instead, you should consult with us to find alternative solutions. We can help you find much better ways to qualify for Medicaid and other benefits to offset the hefty price tag of long-term care, and at the same time, we will keep your family out of court and conflict in the event of your death or incapacity.

We offer a variety of different estate planning packages at a variety of different price points as part of our Life & Legacy Planning Process. With our guidance and support, we will not only help you protect and pass on your home, but all of your family’s wealth and assets, while also enabling you to better afford whatever long-term healthcare services you might require. Contact us today to learn more.

This article is a service of The Solution Law Firm, P.A.™ We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Planning Session and mention this article to find out how to get this $750 session at no charge.

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