Sometimes our clients want us to prepare gifting real property (usually their home) .to their children. They may believe that they could wait out the five-year ineligibility period for gifting and obtain Medicaid. We always try to caution that such actions can cause a detrimental effect that is unnecessary.
In Florida your home has a constitutional protection against creditors. Unlike many other states you can become eligible for Medicaid even though you own a home.
Furthermore, a lien will not attach to the home for the nursing home expenses when a person is on Medicaid. However, gifting real property to a child or children will cause an ineligibility period. Therefore, the home posed no problem for Medicaid prior to the proposed transfer but by transferring the family created a Medicaid problem. If Medicaid is on the horizon or even possible within five years, all transfers should be approached with caution.
One potential client shared that he had other assets which would pose eligibility problems. In this case, his spouse had a debilitating illness and he was her sole caregiver. He was a Veteran of World War II. Neither he nor his spouse had done estate planning that would allow one of their children or another trusted individual the ability to take care of their finances and health care if they were unable to make their own decisions.
A person in this caller’s position needs to be mindful of what would happen to his spouse if he were to die first. It is possible to leverage their assets in order to provide a higher level of care for the spouse if he died first. He also needs to be aware that he may be able to obtain funds from the Veterans’ Administration in order to assist him in her care in the home or in assisted living. If his and his spouse’s assets exceed the parameters of the VA program, planning can be done to meet the legal requirements of the program.
Another issue when gifting real property is the IRS.
If you give away property, the recipient takes your basis in the property. If you heir inherits the property after your death he would have the date-of-death value as his basis. Let’s say that you gift your home to your son. You bought the house in the 1990’s for $250,000. Now the home is worth $550,000. After the gift your son sells the property for fair market value ($550,000) and must pay capital gains tax on the increase of $300,000. If instead he sold inherited property there would be no capital gains because the date of death value would be his basis. When gifting over the $16,000 annual exclusion amount you are also required to file a gift tax return to report the transfer.
Another way a gifting real property (if it is your homestead) can harm you is by ending the Save Our Homes tax cap on reassessment for real property taxes.
If you have owned property since before the recent large increases in value, and if the property is homestead, the property appraiser can only increase you by the capped amount of 3% annually (or less in low-inflation years). If you convey the homestead to someone else, the cap can be re-set to current value.
Also, gifting real property to a child can expose the property to creditor collection.
While the property was safely homesteaded, no one’s creditors could reach the value of the home including the owner’s. Once you transfer title to your son, his creditors can go after the property. Even if you are convinced that your son has no creditors, he could in the future. Say he has a divorce, the ex-spouse is a creditor. Or if he loses his job he could suddenly owe money to various creditors. Maybe he has a medical event that eats up his savings, or a car-crash that results in a judgment against him. No one wants to think of grim possibilities but they can and do happen.
The implications of any gifting need to be carefully considered. In the prospective client’s situation, the gifting may have thwarted the very benefit that was desired. If you don’t understand all the potential ramifications, consult with an elder law attorney before making a transfer.