Q. I am thinking about giving my home to my son now, so that probate can be avoided and my
affairs simplified when my time comes. Any comment as to whether this plan makes sense?

A. Caution: Transferring your home to your son by gift during your lifetime can have adverse
tax consequences. Example: assume that you purchased your home many years ago for
$100,000, and suppose it is worth $,650,000 today. If you give it your son during your lifetime,
he “steps into your shoes” and the IRS will treat the home as if your son had acquired it for
$100,000. This is called “carry over basis”. If he then sells the home for $650,000, he will be
obliged to recognize the $550,000 difference ($650K – $100K) as capital gain and pay tax
accordingly. This could result in a whopping tax bill for him and actually lessen the net value of
your gift.

True, there would be some relief from this tax situation if your son moved into the home and
lived in it for at least 2 years before sale. In that event, he would be entitled to exclude a part of
the capital gain, i.e. $250,000 if he is single and up to $500,000 if he is married. However, this 2
year residential requirement is often impractical if your son already owns a home, or plans to sell
it sooner than 2 years, or prefers to treat it as a rental.

By comparison, if you hold the home until your death and pass it to your son as an inheritance,
this tax problem can be avoided. The IRS will then treat the home is if your son had acquired it
at its date of death value. In tax parlance, the home’s tax basis would be “stepped up” to its
market value at the date of your death. Example: if it is worth $650,000 at your death and your
child then sells it for $650,000, his capital gain would then be “0” and no tax would be due.
Quite a difference!

In your situation, you may wish to consider a Living Trust, which would accomplish your
objective of avoiding probate while simultaneously obtaining the favored tax treatment which
accompanies transfers upon death. This arrangement would also allow you to retain home
ownership in case you later need to obtain a reverse mortgage to help with your future long-term
care expenses.

Sometimes parents who have received long term care benefits from the Medi-Cal program,
consider a gift of their home in order to avoid a Medi-Cal recovery claim after their death.
However, if that is the motivation, there are ways to both avoid a Medi-Cal recovery claim while
still preserving favored tax treatment. If this is a concern, professional guidance from an
attorney knowledgeable in Medi-Cal planning is extremely important.