A common question I get from clients when we sit down and discuss their Estate Plan is, should I transfer ownership of the property to my children or other family members in order to save their inheritance or to avoid Pennsylvania's inheritance tax or to prevent the home from going to a nursing home. The short answer is - it depends. Each family situation is unique and we need to evaluate what is the best way to protect an older client. There's quite a bit of information to unpack, and I discuss this in three different parts.
1. Financial Nest Egg & Cost of Living in Later Years. My primary duty as an attorney is to protect older clients and to evaluate their financial needs as we craft an Estate Plan. Often older parents are still living at the family home, they likely own this free and clear without a mortgage, and the value of the home is one of their principal assets. Many clients want to continue to live at their home as long as possible and there is a greater push for in-home nursing care. On the other hand, property taxes, upkeep and insurance are expensive costs and it may not make sense for an older client to continue to pay these costs if their monthly retirement income does not keep pace with these growing expenses. The first step in my analysis looks at the combination of what is the monthly income and expense budget of a client in retirement and will their retirement income keep pace with housing expenses or will maintaining a house take too much of their monthly budget. We also examine health care needs and whether an older client can continue to live on their own and care and feed themselves or whether they need additional daily care as they age. In some family situations, adult children are caregivers or can financial contribute to housing expenses and in-home care expenses, and in other circumstances, there is no additional help from other family members. It may be necessary to sell a family home, convert any proceeds into an interest producing retirement account, and downsize to an apartment or smaller location that has no maintenance headaches and a lower monthly cost. Sometimes a Reverse Mortgage is a smart financial vehicle for an older client who wants to continue to live a home, and other times a Reverse Mortgage makes no sense. While I want adult children to inherit as much as possible after Mom and Dad pass away, my first duty is to protect the older clients and to make sure they continue to have funds to support their retirement cost of living. In sum, it all depends on each family's financial circumstances and whether the sale or refinancing of the house is needed to support a monthly retirement budget. Sometimes this makes sense, and other times it does not. It is exactly for reasons such as this that families must sit down with an experienced elder law attorney to understand all implications.
2. Assisted Living and Nursing Homes. Another factor for consideration regarding whether or not to deed a property to children is whether or not my elder law client intends to or soon will likely transition to an assisted living facility. The family does not want the family homestead to go to the nursing home. When I conduct this analysis, the first step is to evaluate whether a client will exhaust their resources and no longer have assets so they qualify for Medicaid assistance (the government will pay for nursing home care via Medicaid). This analysis is further complicated if there are 2 spouses at home, and one needs nursing home care via Medicaid, and the other remains living at home. If someone could easily give away all their assets including their home to others, declare that they are impoverished, and ask the government to fund their care for the remaining years of their life, this would be the choice for many people. There is a 5-year look back window to examine whether or not there has been a transfer of assets 5 years prior to the Medicaid qualification. Also, any transfer is prorated over this 5 year window -- meaning that a larger transfer 2 months prior to the Medicaid qualification will have to be paid back by a family in its entirety, whereas only a small portion of a larger transfer made 48 months prior to the Medicaid qualification must be repaid. While some clients will exhaust resources and qualify for Medicaid, most clients do not. Different Assisted Living and Care facilities have different price points, entrance fees and monthly costs. In simple terms, some elder law clients have ample resources and can afford the transition to a facility without having to sell or pledge their home as a resource to pay for this care. For many other families, the sale or pledge of the home is needed as an asset to pay for the private facility. Once again, each family circumstance is unique and there is no simple cookie-cutter answer as to whether the deeding of the property makes sense.
3. Inheritance Taxes & Joint Deed Ownership. There is a Pennsylvania Inheritance Tax (based on the net inheritance - not the gross value of an Estate). This ranges from 0% to spouses and charities, to 4.5% from parent to adult child; to 12% for siblings, up to a maximum of 15% for everyone else. When we record a new deed between 2 or more people who are not spouses, the jointly owned deed will either to a Tenants in Common (TIC) Deed (this is the default in Pennsylvania unless otherwise specified), or Joint Tenants with the Right of Survivorship.(JTWRS). (There is a clear legal difference between these 2 types of deeds - please see other blogs and information on our website). If we record a new JTWRS deed, the property is deeded and transferred now, so that others have joint ownership of the property. This removes the ownership of the property from the Probate process or express language of a Will. If one joint owner passes away, the property is already deeded to the remaining joint owners. Once again there are many variables to consider, including the impact a new JTWRS deed has on inheritance taxes, who may have a claim against this property, whether or not the property will still qualify for a homestead tax exemption, and whether the property is subject to an existing mortgage (all new owners must sign off on any future sale or bank loan documents).
In sum, much consideration and attention to detail must be applied in determining whether or not it makes sense to deed a family home to adult children or other family members. Sometimes this makes sense, and other times it does not. This is a complicated topic and an experienced elder law attorney can help a family navigate the pros and cons of this decision.
If you need help in determining whether or not it makes sense to transfer your home to your children, we are here to help. Please send me an e-mail or call me at (610) 374-5841.
Thanks, - Scott