Blogs from October, 2021

It’s not uncommon for parents to think about transferring assets, specifically their home, to their children in their sunset years. They hope to make the transition of assets smooth and easy for their children after their lifetime. Specifically, when there is more than one child, and a parent only wants one of their children to inherit the home, they may think a lifetime gift is the way to proceed. Not thinking about the tax and long term care implications can result in a very expensive mistake.

Losing the Step-up In Basis

Capital Gains Tax is a tax that is imposed upon the sale of an asset that has increased in value. When someone buys their home at a low price and then sells it at a much greater price, that difference might be subject to capital gains tax (after deducting their personal capital gains exclusion amount, closing costs, and adding in capital improvements). If you gave your child your home during your lifetime, you are also giving them your cost basis, so that when your child sells the home, the child’s cost basis will “carry over” and be the same basis as yours, the very low price you paid for your home. On the other hand, if your child inherited your home only after your death, he or she would get a new cost basis that would “step up” to your date of death market value, which could be the difference in hundreds of thousands of dollars of tax savings when the capital gain is calculated.

For Example: In 1964, Martha bought her Flushing, New York house for $65,000.

With the capital improvements she made over the years in the amount of $235,000, her total cost basis is $300,000 ($65,000 plus $235,000).

In 2021, the market value of her home is $1,300,000.

If Martha transferred her home to her kids during her lifetime: If she gifts the house to her children during her lifetime, when her children sell, they will have to pay taxes on the capital gain, which is the difference between the net sale proceeds and Martha’s basis of $300,000. This could amount to several hundred thousand dollars in taxes.

If Martha does not transfer the home to her kids and they only inherit the house after Martha dies: When her children inherit the house, instead of a $300,000 cost basis, the children get a “stepped-up” basis to the market value at the time of Martha’s death. So if the market value at the time of her death was $1,300,000 and then the children’s cost basis would be $1,300,000. If they sell it right after her death at market value, there would be no tax at all.

So you see, transferring the home to your kids could have a catastrophic and costly tax impact that a little bit of patience and a lot of good advice could prevent.

Long Term Care Issues

If your health declines and you need long term care in the future, you may need to apply for Medicaid benefits to cover the high cost of your long term care. Medicaid imposes a penalty on eligibility for any assets transferred for less than fair market value during the Medicaid lookback period. Transferring your home to your child during your lifetime, at a point in your life that you may need long term care in the near future, is not advisable.

For Example: In 2019, Bradley and Margie transferred their home worth $700,000 to their son Charlie.

In 2021, Margie suffers a stroke, and ultimately needs to remain in a nursing home.

A nursing home will cost $15,000 month to pay privately but Medicaid long term care would cover the cost if Margie was eligible for Medicaid benefits. Because of the Medicaid lookback period, Margie will not be eligible for Medicaid benefits until five full years have passed since the 2019 transfer. If she applies in 2021 without a further strategy, Medicaid would impose a penalty due to the 2019 home transfer that would render her ineligible for even longer than waiting the full five years.

If the house had not been transferred to Charlie, Margie could have utilized another planning strategy to become eligible immediately (such as transferring the house ownership to Bradley).

If Charlie agreed, he could transfer the house back to his parents, and all would not be lost, but what if between 2019 and now Charlie had a creditor issue? Got Divorced? Died? Or simply didn’t agree to transfer the house back? We can hope that our children will cooperate, but what if something happens that is out of their hands?

So you see, transferring the home to your kids could have a catastrophic and costly tax impact and unanticipated long term care impact that a little bit of patience and a lot of good advice could easily prevent.

How an Attorney Can Help

There are very good strategies available to address your objective of a smooth transition of your wealth while minimizes taxes and also providing protection against unanticipated long term care costs. Contact us today to help you set up a customized plan that will address your individual needs.

The cost of protecting your home may become a bit more affordable in Nassau County.

On Friday, October 1, 2021, the Nassau County legislature voted to eliminate $106 million in real estate and traffic fees. The fees to be eliminated includes the hefty $355 fee for each “tax map verification” letter required by the county per section, block and lot when recording certain documents with the county clerk, including property deeds.

All 11 Republican members of the county legislature voted for the fee cuts while all 8 Democrats abstained from the vote. If the County Executive Laura Curran (Democrat) vetoes the fee cuts, then the bill will only proceed by override with a supermajority of 13 legislators.

Previously, this fee has been challenged as unconstitutional and in March of 2020, a State Supreme Court issued a ruling striking the collection of the tax map verification fee and declaring it an unlawful tax. Nassau County is currently appealing that decision and during the pendency of the appeal, the county is continuing to collect the fee.

One aspect of Medicaid long term care planning is protecting the individual’s home, which is often a person’s most valuable asset. The process includes the execution and recording of a deed transferring the home from the current owner to a trust and in some instances to other family members.

The county clerk’s office collects a recording fee to record the deed, which recording is necessary to put the world on notice of the new ownership. Each county has its own schedule of recording fees, which can range from under $100 to about $500.

In addition to the recording fees, the Nassau County Legislature passed a law several years ago that required many types of documents submitted for recording, including deeds, to be accompanied by a tax map verification letter for each section, block and lot associated with a recording. In 2015 the fee was $75, increasing by 200% to $225 in 2016, and then in 2017 further increasing by an additional 60% to $355. The current fee of $355 is in addition to the recording fee of approximately $500.

In addition to the attorneys’ legal fees associated with an estate plan or long-term care plan, currently homeowners in Nassau County are subject to County/title costs over $900 merely to record the deed associated with their planning. This adds a significant expense to those seeking to protect their home. Elimination of the tax map verification fee will significantly help bring the cost down to preserve homeowners’ most cherished asset and make the transfer process more affordable.

The bottom line is that no one should decide whether or not to protect their home worth hundreds of thousands of dollars based on a $355 difference, but the savings of such an amount will be felt in the pockets of those wise enough to proceed with their planning.