Protecting Home from the Government

from Bluffs & Bayous May/June 2023

THE socialSCENE NATCHEZ,

ARTICLE | Lucien C. Gwin III

The idea, of course, is that if you put your home in the name of your adult children and then you need to go into a nursing home, then the government will have to pay the nursing home tab and the home is spared from having to be sold to defray the nursing care. However, it really doesn’t work that way.

First, if you want Medicaid to foot the bill, you must not have owned your house for at least five years. In other words, if you put the house in your children’s names without their paying for the house and then, let’s say, if three years later you have to go into a nursing home, Medicaid will not cover you.

Also, if your bank account has more than $4000.00, then you will also have to “spend down” to that amount before you are eligible.

There are several other disadvantages to putting your house in your children’s names. First, in Mississippi, you could lose your homestead exemption. If you are over 65 in Mississippi and you sign up with the tax assessor’s office for age-related homestead, you get a pretty good break off your property taxes every year. Once you convey the title, you have to pay for the full ride.

The next disadvantage in putting your house in your children’s names, is that you lose control of what happens. You cannot mortgage the house without their blessing, you cannot sell it without their approval, and you cannot modify or alter the property without the children’s okay. I have seen such situations arise.

The final disadvantage to placing your home in your children’s names is the real possibility of having to pay capital gains when the home is eventually sold. If you die still owning your property in your name and your children inherit the property, then they can claim what is known as a “stepped up basis.” This is a benefit to your children.

Here is how that works. Let’s say you bought your home in 1965 for $50,000 and have continued to live there all of these years. The $50,000 is your basis. And let’s say that today the house has a fair market value of $350,000.00. If you die owning the home, then your children’s basis in the property is $350,000. That means, if they sell the home for the fair market value of $350,000, they will pay no capital gains tax on the money they make off the sale. They get to pocket $350,000 with no taxes owed.

On the other hand, let’s use the same value of $50,000 fair market value that you paid for the home in 1965, and then assume you give the home to your children 7 years before you die. Well guess what? Your children’s basis in the home is $50,000, but let’s assume the house has appreciated in value to $350,000. What this means is that, when they sell the property, they will pay capital gains tax on the difference between $350,000 and $50,000, which would be $300,000.

The federal capital gain rate can be as high as 20%; the Mississippi capital gain rate is 5%. So, potentially, your children would have to pay $75,000 in taxes to Uncle Sam all because you wanted Uncle Sam to pay your nursing home bill.

There is one way to avoid some of the capital gains tax but under the above scenario, and that would be for the children actually to live in the house for 2 or more years before they sell it. If they do this, then they are eligible to exclude up to $250,000 for an individual and up to $500,000 for a couple. Often, however, this option is not feasible for adult children who have their own homes or live out of state.

I won’t say it is never a good idea to transfer your home to a child, but that depends on what the goal is. Are you trying to escape nursing home debt, or are you attempting to engage in estate planning?

I can say that, if you are up in years, it is always advisable that you confer with your estate attorney and/or a CPA before swapping title to real property.

Lucien C. “Sam” Gwin III was admitted to the Mississippi Bar in 1981 and has been practicing many aspects of the law at the firm of Gwin, Punches & Kelley in Natchez, Mississippi, ever since.