“When planning for retirement, clients often face a fundamental decision: With the kids grown and moved out, is it time to sell the family home and downsize? That is one thorny question financial planners should be prepared to discuss with advisees, Ben Mattlin writes in Financial Advisor Magazine, raising “a complex mix of financial and emotional considerations”. The financial logic behind the idea, Mattlin explains, is that selling a large house to purchase something smaller will save money, but the reality is more complicated when building costs and moving expenses are considered, not to mention capital gains taxes from the sale. Retirement communities may have homeowners association and amenity expenses.
From an estate planning point of view, we’ve found in working with our Geyer Law clients, there are other considerations when it comes to downsizing as well. Mattlin astutely points out that parents who automatically move to “be closer to the children and grandchildren” might find out that their kids aren’t planning on staying in that location for the long haul.
For those seniors who’ve made the decision to “age in place”, spending the rest of their lives at home, it’s important to decide what will happen to the property after they are gone. “If you own a home and plan to pass , naming options for passing ownership of a home to kids include:
- gifting it to them while you’re still alive
- naming them as beneficiaries of the home in your will or trust
- signing a “transfer on death” document
However, as we cautioned in our Geyer Law blog years ago, transferring your home to a child or children during one’s lifetime may not be such a good idea, for a number of reasons:
- Once you gift your home to a child, it becomes an asset subject to that child’s creditors and potential lawsuits (if they were to experience financial difficulty or become involved in a contested divorce)
- If your home has greatly appreciated in value over the decades and you die while still owning the home, there would be (under current tax law) a “step-up in basis“, avoiding a large capital gains tax liability for the heirs. That advantage would be lost were the home to be transferred into the name of an adult child while the parent is still alive.
- Transferring a home to a child is subject to a five-year look-back period under Medicaid rules. If a home is transferred within five years of a Medicaid application, the applicant may not be eligible for Medicaid because he or she gave away assets which could have been used to pay for care.
While each family situation is different, “homing in” on your estate plan certainly involves facing some very fundamental decisions.
– by Cara Chittenden, Attorney at Rebecca W. Geyer & Associates
