The Home – To Transfer or Not to Transfer – Part 1
Home ownership has long been a large part of the American dream. Through the course of the 20th century, the percentage of Americans owning their homes rose considerably. In many of these homes three generations lived under one roof. Today, there still are many 3 generations homes. The reasons for it are the same. The grandparents often help care for their grandchildren while the parents are working. Sometimes the grandparents need assistance and canât live alone any longer.
There is, however, a big difference between the households of the 20th century and those of the 21st century, which generation owns the home. The parent homeowner of the 20th century now is the grandparent homeowner of the 21st century.
So now that homeowner, weâll call him Joe, is in his 70âs. His son Jim and Jimâs wife and kids live with Joe. They are concerned that as Joe ages and needs long term care they may lose the house. Jim wants to buy a house but canât afford it, even in todayâs depressed real estate market. So they come upon a solution. Joe will transfer his house to Jim or perhaps sell to Jim at a reduced price, maybe enough to pay off Joeâs mortgage. Jim will have a home of his own to raise his family and Joe will have the support of family should he need it. A win â win scenario for everyone. Right?
Well, not so fast. If Jim doesnât pay fair market value for the home then the uncompensated amount is treated as a transfer for less than fair value should Joe need Medicaid benefits in the next five years to pay for long term care.
What to do? Joe and Jim must understand that if Joe needs care there must be a plan in place to cover the cost of that care. That plan could involve VA benefits if Joe is a veteran. It could also include using Joeâs funds to pay for his care and long term care insurance benefits. But, if these sources of payment still leave a gap then Jim will need to borrow against the home to pay for Joeâs care, which may mean putting off tapping into the equity to pay for renovations or other expenses.
Provided these contingencies are covered, however, the home transfer can work well. What happens, however, if Joe is not healthy when contemplating a transfer, but instead has dementia and already needs some care. In that case, the home transfer is a little more complicated but Iâll address that in the next weekâs post.