We often meet with prospective clients who have decided to convey real property to their children or other beneficiaries for various reasons. Sometimes we hear that the goal is “avoiding probate.” Other times we hear that the purpose is to prevent the government from getting the property if Medicaid is needed.
The ramifications of deeding property are great and should be fully explored prior to deeding property to another.
First, a deed can be prepared that conveys the property at death but does not convey a current interest in the property. If a person’s concern is avoiding probate, this type of deed is greatly preferable than giving a present interest in the property. Should the property need to be sold in the future, only the signature of the current owner is required. Past experience has shown that relationships sometimes change and if the relationship with the child becomes problematic, it may be difficult to obtain the signature to convey the property.
If the property is conveyed after death, the recipient will get a “stepped up basis” in the property. If the property is conveyed during life, the recipient assumes the basis of the grantor. Therefore, if an elder has a low basis in the property and the property has increased in value, the beneficiary will owe a tax on the capital gain on the sale of the property if it is conveyed by deed during life.
Gifts (including conveyance of real property) cause ineligibility periods when applying for Medicaid. Sometimes we work with families and plan for a disqualifying gift. It is done as part of a larger plan to obtain benefits sooner rather than later. However, making small gifts over time is seldom the best answer. We encourage families to consider how they will pay for long term care in settings other than nursing homes before gifting away property.
Gifts of homestead property are particularly problematic. In most cases, the homestead is not a countable asset for Medicaid purposes. Conveying the homestead can create ineligibility periods. If the homestead property is deeded to children who do not live on the property, the homestead tax exemption and exemption from creditor claims is lost.
All of the ramifications of conveying property should be explored before property is conveyed. The magnitude of the problem that is being addressed must be weighed against the side effects of the action.