Giving house to only son does not make financial sense

Q: Since my wife died two years ago, I have been lonely and not very happy continuing to live in the home we shared for 55 years. Too many memories, I guess. Because of my pension and good investments, I have an income of nearly $50,000 per year -- enough, I think, to allow me to live comfortably in an independent living community and pay my way should I become unable to care for myself.

Which brings me to my question: I am considering giving my home (worth $150,000) to my only son so he can take care of the property, pay the upkeep, keep it from going through probate and avoid any estate taxes. I talked to my financial planner, and he thought it was a good idea because, he says, I don't need the money. Are there good reasons not to give it away?

A: A growing number of seniors who write us have opted to take advantage of the "real estate bubble" by selling their homes -- which they built or purchased for, say, $20,000 some 50 years ago and are now worth 15 times that -- and taking advantage of the personal residence capital gains exclusion of $250,000 for unmarried individuals and $500,000 for those who are married.

But it is unusual for seniors to want to give away a $150,000 asset in these uncertain times without full discussion with a knowledgeable attorney and certified public accountant of all the risks such a transaction brings. While financial planners' advice may be valid, we believe it would be a mistake to rely on this alone for a number of reasons:

1) If you transfer you home to your son, you lose not only control over the use and possession of your property, but also the proceeds if it is sold, and rental income if it is rented. In addition, your son could mortgage it or, if he is in debt or owes back taxes, your house could become fodder for his creditors, the IRS and even bankruptcy. If you don't like the accommodations where you will be living, giving away your house also will reduce your options substantially.

2) By making this transfer, you will lose all rights to benefit from property tax relief that is available for seniors over age 65 or disabled. At the same time, if your son chooses to sell your home, he will incur capital gains taxes calculated on the difference between your cost basis in the house and the amount he receives from the sale. Depending on where you live, state and federal capital gains taxes will generally amount to 20 percent of the gain. The state checks to see if transfers of any property (including a home) have been made within the past five years when you make a Medicaid application.

3) While $50,000 annually is a lot of money, with the escalating cost of health care and no guaranteed returns on your investments, you may find yourself digging into assets at a faster rate than you imagine. And should you run out of funds and have to apply for Medicaid within the next five years, the $150,000 penalty generated by the gratuitous transfer to your son will begin running when your Medicaid application is turned down. In other words, should you run out of money and apply for Medicaid within five years from the date of the gift, your penalty will begin to run after Medicaid turns you down for services -- meaning you will be required to pay for your care or you will be discharged.

Taking the NextStep: Unless there is a very good reason, we generally try to dissuade seniors from making gifts that will reduce their future care and quality of care. Unless you own more than $2 million, you will not have an estate tax problem. While the door is still open with regard to what that limit may be in 2010, recent legislation passed by the House of Representatives establishes the unified credit effective exemption for gift and estate tax purposes (called the "basic exclusion amount") at $3.75 million for folks who die in 2010. The Senate will take up this legislation in the near future, so keep an eye out.

 

Give up no assets unless you become mentally disabled..consider forming a trust that is triggered only by such a disability...live in your own residence as long as you can afford to hire someone to come in and help perform routine task you cannot do yourself...don't give assets or control to anyone until you absolutely have to do so.






P.S.Get out and meet some new people...you're not dead yet!

 

borrow the entire equity, put it in a fund, have son pay rent > loan payment and taxes/insurance. leave it to him on your death and have your life insurance pay off the note.

but talk to a planner first.

:bananalam