Burdened by a Gift

“I’ll just give the house to my kids now, so that way Medicaid can’t take it later.”

I’ve heard this line countless times from parents in their 60s and 70s. You’ve worked hard for your home and, naturally, you want to protect it. Giving your house to your children now seems like an obvious solution, ensuring that it stays in the family and isn’t taken by a nursing home or the state. It feels like a simple, logical move. But the truth is, this well-intentioned decision can have unintended consequences. What seems like a protective measure could end up causing severe financial strain and legal headaches for you and your children.

The Hidden Tax Trap

When you give your house to your children while you’re still living, you’re not just handing over the keys but also your original cost basis. This means whatever you originally paid for the home, plus the value of any additional improvements, becomes their starting point for tax purposes. If your child later sells the house, they’ll owe capital gains tax on the difference between your original cost and the sale price.

For example, if you bought your house in 1985 for $75,000 and added $25,000 worth of improvements over the years, your cost basis is $100,000. Now let’s say your child sells the house later for $400,000. That’s a $300,000 profit. You may think, “that’s great,” but you can’t forget the hidden tax trap. A large profit like this could lead to quite a hefty capital gains tax bill. Ouch!

“Friendly Sales” Can Backfire

Now, you may be considering alternatives to avoid the risks of outright gifting. One option is to sell the house to the children at a so-called “friendly price” – maybe just enough to cover paperwork and minor expenses. After all, if your children are paying something, it’s not really a gift… right? Not exactly.

While your intentions may be practical (or generous), the State Medicaid agency views the situation differently. If you sell your home to your child for less than fair market value, the difference between the fair market value and what your child pays is deemed a gift of equity, resulting in a penalty or period of disqualification. This sale may still result in potential capital gains consequences, gift tax reporting requirements, and other financial repercussions.

Medicaid and the Five-Year “Gotcha” Rule

Here’s where things get even trickier as we explore how the gift impacts your eligibility for long-term care benefits. Medicaid looks back five years from the date of your application. Giving away your house or selling it below fair market value during this period may result in a penalty period, during which you’re disqualified from receiving assistance.

The penalty is determined by the fair market value of what you gave away, divided by your state’s average monthly cost of nursing home care. In New Hampshire, the average monthly cost of nursing home care exceeds $11,000. If you gave away a house valued at $220,000, Medicaid would impose a 20-month penalty.

After giving away the house, you no longer have those assets to rely on if you need to pay for care. If Medicaid imposes a penalty period because of the gift, you’re essentially stuck in limbo. Not only are you ineligible to qualify for benefits, but you also have limited financial resources to cover nursing home or in-home care out of pocket. This situation can leave you and your family scrambling to find temporary solutions, such as dipping into retirement savings, borrowing money, or trying to undo the gift, which is often impractical.

Smart Planning Starts Here

There are ways to protect your house while planning for long-term care, but giving it away prematurely and without proper guidance is rarely the right first step. A thoughtful plan considers both tax consequences and Medicaid rules, helping you avoid gaps in coverage.

At Cocheco Elder Law Associates, we work with families throughout New Hampshire and Maine to create personalized plans that safeguard their homes, assets, and future care. If you’re considering passing your house on to your children, let’s ensure it doesn’t come with strings attached. A thoughtful plan today can save you and your family a lot of stress tomorrow.