While you may expect to avoid the hassles of probate after your death by giving your home to your son or daughter, there often turns out to be many pitfalls that could potentially put you and your heirs through significant hardships. In this second installment of evaluating the risks and consequences of gifting your Pennsylvania family home to a child, you will learn about additional impacts of potential creditors, how Medicaid views such transfers of property, and other issues.
Long-Term Care Medicaid Ineligibility Risks
While Medicaid is a federal program, many states like Pennsylvania have their own ways of reducing instances of Medicaid abuses, like fraud or manipulating one’s assets in order to qualify. These are in addition to standards imposed by the Deficit Reduction Act of 2006. One of the provisions that have helped curb such instances is the five-year “look-back” period when determining eligibility.
When applying for Medicaid, all of your countable assets and financial history for the previous five years will undergo a thorough review when determining your eligibility. Transfers of real estate within this investigative window typically make individuals ineligible for this crucial medical assistance or could delay their eligibility significantly.
If denied Medicaid benefits, the penalty is usually dealt out in additional ineligibility time. Meaning, the amount of the assets you gifted during the five years before your Medicaid application are valued at how many days of care in a long-term care facility (ALF) would have been paid for with that gifted property. Like other states, Pennsylvania has what is known as a “penalty division.” This term describes the average cost of a daily stay in a nursing home. This amount is what they divide your disqualifying transfer of property value by determining how many days would have been covered if you had liquidated the asset instead.
For instance, if you give your home to your son, and it was worth $100,000 at the time of the transfer, the state could take the average daily cost of living in a long term care facility, assume $300 for this example, and divide that into the home value. The resulting number of this formula ($100,000 / $300) is 333 days, and you will pay for those out of your own pocket before Medicaid steps in.
Outstanding Debt with Creditors
Another concerning risk of giving away your home to your child is the risk of outstanding debt owed to creditors. If your child ends up in a car accident and is sued for damages, or they have large amounts of credit card debt, your property may be subject to liens and other actions by these creditors. This could also include scenarios where your child is ordered to sell the property as part of a divorce settlement.
Your Child Precedes You in Death or Becomes Disabled and Needs Government Assistance
One aspect that many parents either forget or don’t want to consider is if their child dies or becomes permanently disabled. If your child were to be injured in a car accident and suffer a disability requiring assistance through Medicaid, for instance, the home you gifted them could become detrimental to their eligibility.
Worse, in the event your child passes away before you do, you may not be able to regain ownership of the home if they pass intestate (without a will). If you do receive the property back in case of their death, keep in mind, you will likely owe the 4.5% rate of inheritance tax according to Pennsylvania state law.
Your Relationship with Your Child is Unstable
The majority of parent-child relationships result in a lifetime of trust, loyalty, and respect. For some families, this may not always be the case. There are cases where disputes between parents and children resulted in evictions of parents, instances of home sales where none of the proceeds went to the parents, and other similar issues. While this is very rare, be sure to have additional retained assets available for housing and care if this should happen to you.
Experienced Estate Planning Attorneys are Your Best Resource for Gifting a Home
As you can see, many different complex circumstances can affect the long term financial consequences of gifting your home to your child in the state of Pennsylvania. From tax implications to potentially losing Medicaid eligibility, It’s critical to plan for all scenarios by consulting with an experienced estate planning attorney first.