Options for Family Home Transfer
This is the second of a three-part series which addresses various issues related to the family home, and planning for, or reacting to, a long-term care crisis. Last week’s article, which can be found here https://keystoneelderlaw.com/family-living/the-family-home-part-i-of-3/, addressed various matters that are important to consider when evaluating how to transfer the family home. This week, we will explore options for when the parents want multiple children to benefit from the family home.
In families for whom the homestead was or still is a family farm, it has long been customary to subdivide some acreage along the public road to create building lots for individual homes adjacent to the fields. Although sometimes economic conditions or other circumstances have motivated farmers to sell these lots to non-family members to raise funds, with great frequency these lots have been used to help the children get a head start economically, as well as to keep the family close together.
For most families, the “homestead” is not a farm or other property that can be subdivided to build another house. More than half of twenty-first century Americans live in suburban homes, in neighborhoods which are comprised of individual building lots on land which was once farmland or wood land, now accessed by roads that were built after World War II. Except for a relatively small percentage of circumstances when families have lived together under one roof, the multi-generational sharing of the homestead property on which children were raised is no longer practical.
The arts have given countless expressions of the passion that fuels the human desire to preserve whatever property serves as our home as a physical symbol of the family legacy. “There’s no place like home” is most remembered as Dorothy’s concluding revelation in the “Wizard of Oz,” but scholars trace that phrase back to an 1823 song “Home, Sweet Home,” as well as earlier English writings.
Estate planners have introduced parents to the idea of a “family trust” as a useful tool to preserve the family home from the burden of taxes or long-term care expenses. Most of our new clients who bring us their revocable living trust (RLT) are surprised to learn that an RLT is not an effective asset preservation tool. However, as long as a home is transferred to an irrevocable trust at least five years before funds are needed to pay for nursing care, the irrevocable trust does make the home exempt from consideration by the government as an available resource from which payment either could be provided or recovered for the cost of nursing care.
It is important to know the difference between a RLT and an irrevocable trust. Artful language is needed to preserve the step-up in basis of the home at the death of the parent/grantor. We have covered these issues in other articles which have been published in the Sentinel and are available on our website here: https://keystoneelderlaw.com/estate-planning/
When an irrevocable trust is created as an effective asset preservation trust, and the family home is deeded into it, then the residents of the home are no longer the legal homeowners. The trustee of the trust becomes the homeowner. While the trust maker, who is the grantor, could name herself as the trustee and make decisions as the homeowner, such a circumstance would defeat the asset preservation function of the trust.
Parents who put their home in an irrevocable asset preservation trust lose their ability to use it as collateral to borrow funds for necessary home repairs, such as a new roof. As residents of the home, parents normally remain responsible to pay for operating costs, taxes, and home repairs. Parents who do this type of trust planning usually have the notion that they will spend the rest of their lives as a tenant in the home unless they need to leave it to obtain nursing care in a facility.
In some cases, parents want to make sure that a home remains available for the benefit of one child who is living in the home with the parent as an adult because of special needs that disable the child from the ability to live independently. Whether such a child can live safely in the home after the parents’ death, independent of other live-in supervision, is an important consideration. Unlike most other forms of trusts which are used to preserve a family home, a trust for the sole lifetime benefit of a special needs child may be created upon a parent’s entry to a nursing home without causing penalties in relation to getting government benefits for nursing care.
By naming their other children or the children’s lineal descendants as successor beneficiaries of the special needs trust after the death of the special needs child, the parents’ could provide some future benefit for their other lineal descendants. This is especially useful if the family home is the parents’ only asset. Similarly, a life estate could create a life tenancy for the special needs child, with a remainder interest for other lineal descendants.
The worst option to preserve the family home is to transfer the deed into the name of one or more of the parents’ children. Especially when a family’s history has been as ideal as television’s Cleaver family, it might be difficult to foresee how the parents’ future economic well-being could be damaged by such a co-owning child’s unexpected divorce, bankruptcy, addiction or other serious illness.
Many of our clients have children who have achieved their economic independence. Especially when such children do not live locally, they do not share their parents’ interest in the family home. Instead, they say some version of “all I want is for my parents to be happy and safe, get the care they need, and not need me to pay for it.”
Next week’s article will conclude this series of articles. It will explain the best option for the family home when it becomes empty because the parent is receiving long-term care in a skilled nursing home.
Dave Nesbit, Attorney