For every person who signs a deed to a child without a hitch, there’s another who later regrets it. Transferring a residence to an adult child can work in some situations, but it often introduces risks that families don’t anticipate. Before you move forward, be sure you understand what you might be giving up and what new exposures you could create.
First, you lose control. Once you give the home away, your child becomes the legal owner. They could decide to sell or mortgage the property, or even charge you rent or ask you to move out. Even if everyone has the best intentions today, relationships and circumstances can change, and you may not be able to unwind the decision.
Second, watch the tax traps. If you keep living in the home after gifting it and do not pay fair market rent to your child, the IRS can treat the home as part of your taxable estate at death because you retained “incidents of ownership.” In addition, transferring the home during life generally uses part of your gift and estate tax exemption, which may not be the most efficient way to pass wealth.
Third, Medicaid rules matter. Many people transfer a home hoping to qualify for long-term care assistance, but Medicaid applies a five-year look-back period to gifts. A transfer within five years of applying can be counted against you and delay or prevent eligibility for benefits, defeating the purpose of the gift.
Finally, your child’s creditors step into your shoes. If your child has debt, gets sued, divorces, or files for bankruptcy, the home could be exposed to their creditors’ claims. A well-intended transfer can put a major asset at risk through no fault of your own.
Bottom line: transferring your home to a child is a significant legal and financial decision. It can affect your housing security, taxes, benefits planning, and creditor exposure. Before you act, talk with an experienced estate planning attorney about safer alternatives and whether a different strategy, such as a trust, life estate, or carefully timed plan better fits your goals.
If you would like to learn more, or set up a complimentary estate planning consultation with one of our Madison, Wisconsin estate planning attorneys, please contact us and we can schedule a time to meet.