By Attorney Jacquelyn M. Yeakle
In Pennsylvania, there are potential implications to consider prior to transferring the deed of a home for no or nominal consideration to a child. It is common for parents to desire to transfer their home to their child prior to death. Some may want to avoid inheritance taxes. Others may want to avoid probate so their child is not burdened by the process. Parents generally believe transferring their home to their child prior to death is the best solution. However, that is not always the case. Here are some risks to consider prior to transferring a home for no or nominal consideration to a child:
1. Inheritance Taxes: Inheritance taxes may still be owed. There is a one-year lookback for inheritance taxes. For example, if a parent transfers title of the home to a child within one year of the parent’s death, then the parent’s estate will pay inheritance taxes on the home.
2. Medicaid: Medicaid benefits may be denied. Medicaid views the transfer of a home for no or nominal consideration as a gift. There is a five-year lookback for Medicaid purposes. For example, if a parent transfers title of the home to a child, and the parent applies for Medicaid benefits within the next five years to assist with long-term care costs, then those Medicaid benefits may be denied.
3. Income Taxes and Capital Gains: Capital gains tax may be owed by the child. For example, if a parent transfers title of the home to a child and the child never makes the home his or her primary residence, then the child assumes the original basis. Furthering the example, if the parent bought the home for $50,000, transferred title to the child, and the child sells it in the future for $100,000, then the child will report the capital gain of $50,000 on the child’s personal income tax return. On the other hand, if the parent put the home in his or her will and devised it to the child, then, although the estate will pay 4.5% inheritance tax on the entire value of the home, stepped-up basis will be used. Thus, the basis would be the value of the property on the date of the parent’s death. The capital gains owed by the child outweighs the inheritance taxes owed on the home in many cases.
These risks should also be considered when a parent adds a child to a deed. Because each circumstance varies, it is best to consult an attorney prior to transferring a deed for no or nominal consideration to a child. The attorneys at Walters & Galloway, PLLC are always here to help!
