January 16, 2012
The correct answer is “it depends.” It depends on your unique family, health, and financial situation, and which state you live in. Tax consequences also have to be considered. In the event you need long-term care, there is a “look-back” period, which can be as much as five years, that applies to gifts (transfers of assets without consideration). Therefore, if you are faced with a chronic or catastrophic illness within the look-back period after you transfer the home to your children, such a transfer may impact your ability to obtain Medi-Cal (Medicaid) benefits.
California treats the transfer of the home different than any other state. In all states the home is an exempt asset for Medi-Cal (Medicaid) qualification purposes. However, in California the home’s exempt status is for all purposes and therefore the gift of an exempt asset – in California only –does not create a penalty. This is a very complicated area of the law and requires careful consideration. In any event, if you give away your home you lose control over it.
If it makes sense to transfer the home to your children, there are several ways to structure the transfer. The first is an outright gift to your children. This is generally not advisable for tax reasons and asset protection purposes. The second is by completing the transfer but retaining a life estate. While generally superior to an outright gift, this is also not without problems. However, the retained life estate does give you some legal control over the property and also preserves some tax benefits associated with inherited property versus gifted property. The third is a transfer of your home to an irrevocable trust. This is usually the preferred method of protecting the home as it balances tax benefits with asset protection issues and also protects the home from your children’s creditors or in the event they predecease you. As you can see the transfer of your home is something that requires careful consideration and sound legal advice.