Pass the Peas, Not the Property: The Retirement Dinner Conversation You Need to Have

One significant asset, both emotionally and financially, is your home. As you plan your estate, you might be contemplating whether to transfer your house to your children during retirement or to leave it as an inheritance. But, considering tax implications, financial security, and control over the property, leaving your house as an inheritance could be a more beneficial choice.

Understanding the Implications of Home Transfer

Many retirees ponder whether to transfer their house to their children during retirement. However, doing so might not be the most prudent decision. While this action might seem beneficial initially, it has significant potential drawbacks.

First, property gifting could inadvertently burden your children with significant capital gains taxes. When a property is gifted, the recipient assumes the original cost basis, the amount you initially paid for the home. If the house has appreciated significantly over time, they may face a hefty tax bill when they decide to sell it.

According to the IRS, as of my knowledge cutoff in 2021, the lifetime gift tax exemption was $11.7 million per individual. This means if the house’s value and other gifts you have given during your lifetime exceed this threshold, you may owe a gift tax.

The Advantage of Inheritance

On the other hand, leaving your home as an inheritance provides a significant tax advantage known as a ‘step-up in basis.’ When your children inherit the home, the cost basis is stepped up to the house’s fair market value at the time of your death. This means that if they choose to sell the home, they would only pay capital gains taxes on any increase in value from the time they inherited it. Given the historical trend of real estate appreciation, this could translate into substantial tax savings.

Retaining Control and Autonomy

Transferring your house to your children during retirement also relinquishes control. Once the transfer is complete, you may lose any say over future decisions regarding the property. Your home could be sold or mortgaged without your consent, leaving you in a precarious situation, mainly if you still live there.

On the contrary, by leaving it as an inheritance, you maintain control over your property until your death. You can sell, rent, or live in the home as you see fit.

Financial Considerations: Medicaid and Creditors

A significant financial consideration when transferring home is its impact on Medicaid eligibility. Medicaid, a program that helps cover long-term care costs, has a five-year ‘look-back’ period. If you transfer your house within five years of applying for Medicaid, you could be penalized and your benefits delayed.

Moreover, transferring your house doesn’t necessarily protect it from creditors. If your children have financial issues, the home could be seized to satisfy their debts.

Embracing Alternative Options

Instead of outright home transfer, other estate planning tools are available, like creating a life estate or setting up a specific type of trust. These options allow you to pass on your home while retaining some control and potentially minimizing tax implications. Consulting with an estate planning attorney or financial advisor can provide guidance tailored to your situation.

Weigh Your Options

Transferring your house to your children during retirement simplifies your financial affairs and provides for your heirs. However, the implications — from tax consequences to potential loss of control and financial security — may outweigh the perceived benefits.

Understanding your options and their potential impacts before making such a significant decision is essential. Remember, it’s not just about your financial well-being but also about ensuring a secure future for your children.