Is Gifting Your Home to Your Kids an Estate Planning Mistake?

A recent article posted to the financial advice site, Nerd Wallet, describes “10 big financial mistakes” seen every year by the author, a Certified Financial Planner. Number 10 on the list is the act of gifting children with valuable estate assets as you get older.

The asset that parents commonly consider gifting to their children is their home. Parents may do this because they think it will create less of a financial burden for their children in the long-run. However, it can wind up being a costly mistake in a number of ways, including the following:

  • There are cases where children have had their parents evicted from their homes. Children may feel that their parents should move to an assisted living facility, or they may simply want to make use of the home themselves. If you gift your home, you’re giving up a lot of control over how long you can stay there.
  • Sometimes, the home is lost to a child’s creditors or to other messy situations such as divorce. After you’ve gifted your home to your child, it can become a part of their problematic financial situation.
  • You may wind up depriving yourself of certain benefits you need, in particular Medicaid for nursing home care.
  • As mentioned in the Nerd Wallet article, your child may have to pay a hefty capital gains tax when they sell your home. When you gift your home, it retains its original tax basis (or cost) for your child; if your child then sells it, they need to a pay a tax on the difference between the current selling price and the original tax basis. However, if your child inherits the home from you, they’ll likely benefit from a “stepped-up basis” reflecting the home’s value on your date of death.

Some parents feel like they should gift their home because it will reduce the taxable value of their estate. However, there are various solutions for reducing the tax burden without necessarily gifting your home. You need to discuss these issues with a reputable estate planning attorney. Don’t hesitate to contact us to figure out the best solutions for your estate planning needs.