Pros and Cons of Gifting Your Home While Living

In this video, Chris Pavcic and Matt Blocki explore the advantages and drawbacks of gifting your house to your children while you’re still living, a conversation often raised among individuals in their later years. They highlight the efficiency of bypassing probate and potential tax benefits, particularly the avoidance of Pennsylvania’s inheritance tax, which can be substantial. Additionally, they discusses how such a move can serve as a strategic asset protection measure for Medicaid planning. Among the cons, is the loss of control over the property and the potential risks associated with changing family dynamics or unexpected life events. This video underscores the importance of thorough consideration and professional guidance before making such a significant decision, as the implications can vary greatly based on individual circumstances.

Video Transcript


Today’s video, we’re going to talk about the pros and cons of gifting your house to your kids while you’re living. This is often a conversation that comes up when parents are in their seventies, eighties, nineties, and just looking at overall asset protection, there’s probate issues as well. So, Chris, tell us about some of the pros of why someone would want to gift their house while living to their kids.


Yeah, absolutely. The first one would be just out of efficiency for the asset transfer from the parents or parent to the kid. This would avoid probate entirely. So just be very smooth. Do it while you’re living, while you’re here. Second, for tax benefits, here in Pa, there’s an inheritance tax of four and a half percent for these kind of transfers. So that would go away as well. And then, so, hypothetically, house is worth.


Half a million dollars. Gifted, well living, you avoid, you know, $22,000 Pennsylvania tax hit. And assuming their estate’s not over, you know, right now the limits are like 13 million per spouse. Then they would avoid federal tax, but. And then just add in there real quick to siblings, that’s 12% tax. And if you’re passing money to grandkids, it’s a 15% tax. So gifting it will living. You could avoid some serious, you know, in Pennsylvania, for our example, inheritance tax. Perfect. And then you were gonna say the third one, I think, was around asset protection.


Yeah. For Medicaid planning, to be eligible for some of these benefits you can’t have, there’s levels for assets. I don’t know. Off the top of my head.


Yeah. So a primary home. If it’s a primary home and both spouses are living, it is Pennsylvania, there’s protection. Now, if it’s a second spouse, one spouse has passed, it’s a second spouse. Work with an attorney. Cause there are limits and roles specific to each state. But in generalities, if you’ve gifted that, you know, five years in one day, and then you’re applying for Medicaid benefits and that house is out of your name, that house cannot be used against you. And hypothetically, if you gift it to your kid could be renting it back to you, and it wouldn’t affect your lifestyle as well. Now, there has to be a high level of trust. You could have a rental agreement that they can’t kick you out. But again, we’re just focusing on the pros right now. Those are some of the pros.


Now, if you are of higher net worth, Medicaid planning is not a thing, because you’re going to have the assets to pay for the healthcare that, you know, the long term healthcare event regardless. So there’d be no point of gifting a home just for the sake of avoiding it, because you’re going to be paying out of pocket anyways. So. Okay, let’s talk about the con. So, obviously, the first con, loss of control. Chris, talk us through what are the risks? Even if you trust your kid now, you know, that kid’s married. Give us some of the risks that could occur if you do give up control of the ownership of your home.


Yeah, I guess the biggest one, just like you just said, you technically don’t have the control yourself. So, in a perfect world, this isn’t a problem with good relationships. But sometimes dynamics can change. And, yeah, you don’t have the control. So if you want to make sure it’s a good.


If you gift it to one kid, you have multiple kid, and you expect that kid’s gonna sell it up after you’re passing, you know, if the relationship with, between siblings goes south and, you know, that’s out of your control, to make sure everything’s equal, if. If the kid that you gift it to will living is married and then gets divorced, that’s now an asset that without the prenuptial or post nuptial agreement, is now has to get split 50. And how’s that kid gonna come up with half the value of the house if you’ve pre gifted it? So, definitely a lot of considerations there that you have to be careful of for the loss, you know, as far as the loss of control case by case basis. So, the biggest con I’m going to point out is capital gain tax.


Because under current tax law, right now, let’s say you bought a house, you know, 30 years ago for 100 grand, and it’s now worth 500 grand. If you gift it now, your kid’s going to inherit the basis, because it’s a. It’s a living gift. So when you pass and if your kid decides to sell the house, they’re going to pay a capital gain tax, 15, up to 23.8% federally, of that $400,000 gain, versus if you left the house to their name, they get a step up in basis under current tax law. And so if they were in a 15% capital gain tax, 15% of 400,000, they would no longer have to pay their basis now be half a million at death. So they’d avoid a $60,000 tax hit. So you’d be trying to save a $22,000 Pennsylvania inheritance tax hit.


But you’d end up having to pay a $60,000 capital gain tax. Hit. So you have to weigh the pros and cons of when you’re trying to save tax. You may end up paying more tax by gifting it now than in the future as well. Now, if you have a high cost basis, then that may not matter at all, and the Pennsylvania inheritance tax would be a much greater savings than the capital gain tax. But you have to really analyze those two.


I guess also, if the intention is not to sell the home for some reason, maybe that could you come out ahead to just trying to think of.


Absolutely. So not a decision to be taken lightly. Obviously, potential family conflicts could be a big issue as well if you’re gifting it to one kid, not the other, but wanted to lay out the pros and cons. If you’re thinking about this, would recommend consult with a professional financial advisor, consult with an attorney. There can be significant pros and significant cons. It’s a case by case basis to whether you should do this while you’re living or wait till you pass

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