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Why Transferring Your House to Kids Isn’t Always a Good Idea

Posted by Chad Seiter | Jun 07, 2024 | 0 Comments

Thinking about transferring your house to your kids? It might seem like a smart move to protect your assets, but there are some important things to consider before you make that decision. One major issue is the cost basis, which can have significant tax implications for your children down the road. Instead, an asset protection trust could be a better option. Let's dive into why.

When you transfer your house to your kids, they inherit your original cost basis. This means that if you bought your house for $100,000 and it's now worth $300,000, your kids' cost basis remains $100,000. If they decide to sell the house, they could face hefty capital gains taxes on the $200,000 profit. This can be a big financial burden, especially if the house has appreciated significantly over the years.

On the other hand, if your kids inherit the house through your estate, they receive a “stepped-up” cost basis. This means the cost basis is adjusted to the market value at the time of your death, potentially saving them a lot of money in taxes.

So, what's a better solution? Consider setting up an asset protection trust. These trusts are designed to protect your assets from creditors and nursing home costs while also providing for your loved ones. One of the key benefits is starting the five-year lookback period. This is crucial for Medicaid planning.

Medicaid has a five-year lookback period, which means any transfers of assets within five years before applying for Medicaid can affect your eligibility. By placing your house in an asset protection trust, you start this clock early, helping to ensure that your assets are protected when you need them most.

It's important to note that while I can help you set up these trusts, I don't provide tax advice. I'm always happy to work with your tax advisor to ensure everything is set up correctly and in your best interest.

While transferring your house to your kids might seem like a good idea, it's worth considering the potential tax implications and the benefits of an asset protection trust. This approach can provide peace of mind and financial security for both you and your family.

About the Author

Chad Seiter

Attorney at Law


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