One of our more common questions at the office, this question pops into just about every estate planning discussion. There is good reason to consider it. For many of us, it's a major asset, financially. Or maybe it's an important family place, emotionally. Whatever the reason, it requires careful consideration of the benefits, consequences, and the options for transfer.
Why would a person give away his or her home?
1. Disposition. Making a completed transfer of a major asset (such as real estate), can create assurance that the property reaches its intended beneficiaries, prior to the transferor's death.
2. Death Taxes. Avoiding federal estate and Pennsylvania inheritance taxes is a major motivator for many people. However, most people are not affected by federal estate taxes (the exemption is now $5.45 million per person, before anyone has to pay federal estate taxes). Pennsylvania inheritance tax is irritating, but fairly low--4.5% if the real estate is passing to children or grandchildren. Nonetheless, tax avoidance motivates many clients.
3. Long-Term Care costs. Many of us will require some form of long-term care (home-based caregivers, assisted living care, or skilled nursing care) at some point in our lives. There are public benefits to pay for some of these services, most of which are means-tested, and most of which have some form of "estate recovery" component. As such, many clients desire to transfer real estate to make qualification for public benefits easier, and avoid any applicable estate recovery.
How can a person give away his or her home?
1. Deed Transfer (Outright). This option is the simplest: a deed transferring full ownership to the transferee. One day, Bob owns his house. The next day, he executes a deed transferring it to his son, Charles. Now Charles owns Bob's house.
2. Deed Transfer (Joint Ownership). This option is only a bit more complex: a deed transfer from one (or two) owners into multiple owners, such as parent and child.
3. Deed Transfer (Reserving a Life Estate). This option is conceptually more difficult, but still easy, in terms of execution. A deed from Bob is executed, transferring his real estate into his son's name. However, the deed reserves unto Bob the right to live and enjoy use of his residence for the remainder of Bob's life.
4. Deed Transfer to Irrevocable Trust. This option is the most complex (and most expensive) of the options, however it provides protections that the other options do not. Each other option presents dangers to clients still residing in the home, mostly in the form of what could happen to the children-owners of the real estate. Irrevocable Trusts eliminate nearly all of these risks, since the future beneficiaries are just that--future beneficiaries. The issues that they face should not affect the Grantor's right to remain in the home. Further, such trusts provide the ability to plan for the events such as death, divorce, and incapacity of future beneficiaries, whereas deed-based transfers conveying some degree of present interest cannot contemplate such changes in circumstance. They are a powerful and effective option to consider. Major downsides generally include up-front cost (legal fees), ongoing cost (added accounting costs and legal fees), and complexity for clients.