Many individuals want to know whether they should transfer title to their homes to a trust or to their children. The short answer is “it depends” upon your objectives and comfort level, among other potential factors. For many individuals, such a transfer may be a very good idea provided it is properly structured. There are several good reasons why a person may benefit from transferring title to their home. These reasons include probate avoidance, estate tax planning, Medicaid planning, and ongoing management of the asset in the event of incapacity.
There are different methods used to transfer title to a home. For example, a deed may be transferred to a revocable trust, irrevocable trust, outright to a family member, or to a family member subject to a retained life estate. The best method to make the transfer can be determined after consultation with a qualified attorney. The wrong method can lead to adverse tax consequences and the loss of the right to live in the home.
Probate avoidance is an objective many clients seek. Avoiding probate means that your estate will not pass through the courts. This typically means that there will be a savings, which is often substantial, in court costs and attorney’s fees. In addition, an estate that avoids probate typically passes quicker to the decedent’s heirs and the settlement of the estate is private as opposed to a matter of public record. Avoiding probate is also a good idea if you anticipate your Last Will and Testament will be contested or if you own real property in more than one state.
Estate tax planning is another reason why many persons transfer their home to a trust. As an example, by transferring title to the home to a “Qualified Personal Residence Trust”, the transferor may save substantial estate taxes by removing the home, and all its future appreciation in value, from the transferor’s estate at a discounted value. The discounted value applies because the creator of the trust retains a term of years where he or she will live in the home rent free. After the retained term of years expires, the creator of the trust must pay fair market “rent” if he or she continues to reside in the home and wishes to keep the home outside their taxable estate. This payment of rent can be another effective way to reduce the size of a taxable estate since the rent is not considered taxable income and does not count against the $5.25 million federal exemption. Note: If the creator of the trust dies before the retained term of years expires, the home will be brought back into the creator’s taxable estate.
Medicaid planning is another reason why many people transfer title to their home to a trust or to a family member. Medicaid planning involves restructuring title to your home for it not to count as a resource or have a lien or estate recovery claim filed against it if Medicaid is sought to pay for long-term care at home, in assisted living or in a nursing home. A proper deed transfer to a trust or to a family member for Medicaid planning purposes will allow for the transferor to continue to live on the property rent free for the rest of his or her life, will keep the real estate tax exemptions in place, will allow the transferor to keep the capital gains tax exclusion if the home is sold during the transferor’s life, and will achieve a step up in the basis of the home upon the transferor’s death.
Ongoing asset management is another reason individuals may put their home (or other assets) into a trust. Under this scenario, an individual is typically the trustee of the trust as long as the person has the mental capacity to serve. The trust language typically provides that if the original trustee loses capacity, another person or entity named as a successor trustee assumes control of the trust.
As you can see, there are many issues present when determining whether to transfer title to a home. Unfortunately, many people fail to properly transfer title resulting in tax and other problems that could have been avoided with proper professional advice.
It is important to have your insurance representative involved in the process to help make sure your insurance coverage remains in place and is not lost due to a change in title.
By: Robert J. Kurre, Esq.
Robert J. Kurre, Esq. is a partner with Kurre Levy Schneps LLP located in Manhasset, New York. Mr. Kurre, a certified elder law attorney, represents individuals and corporations in connection with the planning and administration of simple to complex estates and trusts consisting of assets of modest to substantial wealth. Mr. Kurre’s practice concentrates in elder law, estate planning, estate administration, special needs planning, and estate and trust litigation. His website is www.klsllp.com.