Wills, trusts, sales: How Long Island parents pass houses to kids

Rhonda Glenn’s parents wanted her to have the yellow house where she grew up in Central Islip. The four-bed, two-bath, split-level had a wrought iron fence designed as a replica of the one around the house where they once lived in Guyana.

So, they gave it to her as a gift, but continued to live in it until they died in 2022. Her father, Albert, died in March at 87 years old, and her mother, Daphne, died in May at 85.

A lawyer managed the process. Because the house wasn’t part of a will, it didn’t have to be probated, which can be a time- and money-consuming process.

“Home is where the heart is,” but for many Long Islanders in a market with escalating prices and interest rates, home can be where their youth was. Their parents are taking steps to keep the house, as a place to live or an asset, in the family.

There are many ways to hand down a house — from gifts to outright sales, irrevocable and revocable trusts to wills — each with different benefits and drawbacks. How this is done can have consequences for Medicaid and taxes. Getting it right can make the difference between a smooth transfer with few costs and a lengthy, pricey process.

Handing down homes

[My parents] were big on homeownership. They wanted to pass it down, keep it in the family.

— Rhonda Glenn

Deciding whether, and how, to hand down a home can have financial consequences for both the owners and recipients.

“A lot of people are leaving homes to their children,” said William Jacobs, associate broker at Compass Greater New York, in Rockville Centre. He added that they’re looking into how they can pass this asset to their kids with the fewest problems.

There are economic impacts as well as emotional and physical adjustments (Rhonda Glenn is removing a chair lift in her house, for example).

Glenn, director of supportive services for community and schools at Youth Enrichment Services, expects to be renovating her childhood home for two to three years.

“[My parents] were big on homeownership. They wanted to pass it down, keep it in the family,” said Glenn, now in her late 40s. “You're getting a house that's mortgage free.”

Like Glenn, most recipients are handed a home without a mortgage, because their parents paid it off.

“Parents often were in the home for a long time,” said Melissa Negrin-Wiener, senior partner at Cona Elder Law, in Melville, adding that, if there is still a mortgage, “sometimes it’s a small amount and they choose to pay it off before they make the transfer.”

When a property is transferred out of somebody's name, the bank or mortgage holder can demand the mortgage be satisfied immediately.

“You can’t transfer the mortgage from one person to another,” Negrin-Wiener added. “It’s common practice for the mortgage holder to continue to pay the mortgage."

Negrin-Wiener said the mortgage holder, typically the parent or parents, may continue to pay. But she noted the mortgage still can be called in if the property is transferred and does not want to imply that paying the mortgage will prevent that.

If the mortgage holder calls in the mortgage, that can mean greater expenses, especially with current interest rates. “They would not be able to preserve the lower rate,” she continued.

If people continue payments, banks don’t necessarily call in mortgages, although there should be a record of the deed transfer, experts said. And in most cases, mortgages aren’t factors.

For Glenn, who moved there from Brooklyn with her parents when she was 2, this is a bittersweet homecoming.

“They’re the original homeowners,” Glenn said of her parents. “They thought ahead. That was their plan.”

Putting a house in a will

Joel Katims, an attorney in Stony Brook specializing in wills, trusts and estates, has seen people pass down houses to children through various means.

“The most common way is to leave the house in a will,” Katims said. “When children sell the house, the basis is the value of the house at the [parent's] time of death.”

Beneficiaries named in wills get a stepped-up basis. This means the capital gains the child incurs are based on the home’s value at the parents’ time of death, not the home’s current value, which could be a much larger amount. That gain is then entirely erased for tax purposes for the recipients, which itself is a huge financial benefit.

What if you need to go to a nursing home? Your house is vulnerable. People don’t have the protection, because they don’t realize Medicaid is going to come back later.

— Melissa Negrin-Wiener, senior partner at Cona Elder Law

If adult children plan to hold onto houses before selling, Katims advises getting an appraisal or comparative market analysis to prove the value at the time of death, not subject to taxes.

Katims added that, if the house is sold years later, the value of the house at the date of death may have to be proved in order to use the stepped up basis.

Negrin-Wiener said when houses remain in parents’ names while alive, there can be a potential issue for Medicaid and other liability. Medicaid could determine someone is ineligible for benefits for long-term care, for instance, if the house is in the applicant’s name, no spouse is living in it and the applicant’s equity exceeds the current $1.071 million limit in 2024.

Medicaid could still pay for long-term care even if someone owns a house (under that limit) and otherwise qualifies, but can seek to recoup money from the Medicaid recipient’s estate when they die.

This can lead to situations where children who inherit the house find themselves responsible for reimbursing expensive bills after a parent's death through the house’s sale.

“What if you need to go to a nursing home? Your house is vulnerable,” she said of people who obtain Medicaid benefits. “People don’t have the protection, because they don’t realize Medicaid is going to come back later.”

Gifting a house

Gifting a house is an option, but there are many ways to give.

One is for parents to sign deeds and gift property, said Christina Rosas, member at Melville-based Bond, Schoeneck & King in the property and trust and estates group. A U.S. citizen has a lifetime federal gift tax exemption of $13.61 million, although that could decline in the future.

“For most people, that’s not a factor. For people who are very wealthy, that does factor in,” Rosas said. “There are people who calculate how to use their gift tax exemption, because they will exceed it.”

Parents can sign deeds to transfer houses to children, while retaining a life estate on the deed, allowing them to remain in the property for their lifetime. “The person with the life estate has the right to live at the property and is responsible for the carrying costs,” Rosas said. “When the parent dies, the child takes full ownership.”

Gifts mean assets are transferred during parents’ lives rather than upon death. Katims said this simplifies and speeds things up, since probating wills can be a lengthy and costly process.

“It [probate] used to take two weeks. Now it’s taking months,” he added.

Negrin-Wiener, however, said trusts also can avoid probating wills. “People will put assets into a trust, so the family doesn’t have to go through the probate process,” she said.

Rosas said if a gift is made within the five-year look-back period for Medicaid, it may result in a delay in eligibility or a “penalty period.“ There are various techniques that can be employed to resolve this situation, she said, but in any case, where a gift is made, it can create an obstacle to the gifting parent being able to receive Medicaid.

Irrevocable trusts

Irrevocable trusts, which can be set up as Medicaid trusts, are frequently used to transfer houses, while giving parents the right to remain.

John Kuttin, a private wealth adviser and CEO of Kuttin Wealth Management in Hauppauge, said trusts are used more often than outright gifts.

An irrevocable trust is a common long-term care planning vehicle with the Medicaid clock ticking at the transfer, for those who obtain Medicaid benefits.

“After five years, that asset is protected for Medicaid purposes,” Kuttin said of people who meet Medicaid’s income qualifications for things like long-term care. “If the parent needs care in a nursing home, they could get Medicaid and Medicaid couldn’t come after the house.”

Rosas agreed these are the most popular trusts for houses and can be crafted to receive a stepped-up basis on the grantor’s death.

“Often it’s done in the context of a parent or parents wanting to preserve their property for the next generation,” she said. “They reserve the right to use the property in their lifetime. Upon their passing, it’s distributed to the children.”

Rosas said many people create irrevocable trusts in their 70s to protect an increasingly valuable asset. “The increased value of the property is incentivizing them to take action,” Rosas said.

She said the house can be sold by trustees with funds used to buy a replacement home. But deciding when to do this is touchy.

“No one has a crystal ball,” Kuttin said. “When they start looking at retirement, it’s a good time to make this part of the conversation.”

Once a house is in an irrevocable trust, it can only be sold by the trustee or trustees. The parents who create the irrevocable trust can’t be the trustee, so they can’t directly sell the house, Rosas noted. One or more children typically act as trustee, she added.

“They [parents] can notify the trustee if they want to have the trustee sell and purchase a replacement property to be held in the trust that the parents can use as their residence during their lifetime,” Rosas said. “In this case, if it’s a downsizing and the replacement property costs less, remaining proceeds from the sale of the first property must stay in the trust.”

Revocable trusts

Revocable trusts give parents complete control, which can have big financial implications as well.

“People are setting up joint revocable trusts for houses,” said Andrew Baron, partner in the Private Wealth and Taxation Group at Meltzer, Lippe, Goldstein & Breitstone in Mineola. “We see it all the time.”

He said joint revocable trusts let parents retain control, because it’s still their property in their name. “We don’t usually see parents want to give up control, especially of the house they’re living in, while they’re still alive,” Baron added.

Revocable trusts don’t remove assets from the grantor’s resources to qualify for Medicaid, Rosas said. But there can be benefits. If a joint revocable trust is properly crafted with the two parents as beneficial owners, the trust can be structured to convert to an irrevocable trust and get a 100% basis step up on the first spouse’s death.

“If the second spouse wants to sell the home, they can do so without a capital-gains tax,” Baron said.

Revocable trusts remain in estates, a downside for particularly pricey houses if estate tax is triggered.

“When you transfer a property to an irrevocable trust, you are using a portion of your $13.61 million exemption,” Baron said of particularly pricey houses. “You don’t have to pay estate tax on that property anymore, but you have less exemption to cover your other assets. If you are a New York resident, it’s not a part of your New York estate anymore as long as you survive three years from the transfer.”

Selling a house to your child

A sale is another way to transfer houses, but price is key.

Kerry Gillick-Goldberg, 53, owner of a public relations firm, and Joe Goldberg, 56, a software engineer for a financial firm, initially bid on various houses. “We kept on losing houses that we were bidding on,” she said.

Instead, they took out a $340,000 mortgage in 2000 to buy (and cover anticipated renovations for) Joe’s parents’ house, a 2,500-square-foot Colonial, at market value for $265,000. They made various improvements and lived in a Rockville Centre apartment until the Bethpage house was ready.

“The exterior looks very different. We added and made any windows much bigger,” she said. “We added French doors to the backyard to bring in more natural light.”

The need for renovations is only one thing to watch. The difference between sale price and full market value is treated as a gift. “Make sure it’s done for fair market value,” Negrin-Wiener added, regarding impact on Medicaid.

Jacobs has seen parents sell to children at deep discounts that open adult children up to financial consequences.

“They sell the home for a dollar,” he said, but that price is treated as a gift and is subject to the five-year Medicaid penalty period.

Rosas said if a discounted sale falls within that five-year period, Medicaid can seek funds based on the house’s value. The child who receives this gift also takes the property at the same tax basis as the parents who made the gift.

Doing nothing

Sit down with an attorney and look at the options. See what works best for your family dynamic.

— Real estate agent William Jacobs

The worst decision can be doing nothing. Although wills can be contested, not leaving a will or taking any action can lead to complications.

Jacobs mentioned recent clients who are siblings trying to handle a house without a will or other documents. “They both want to sell, but they're squabbling over it,” he said, noting they're vying over who should be executor.

The sister, who lives in the house and was their mother's caretaker, and the brother each want to pick the executor.

“Sit down with an attorney and look at the options,” Jacobs said, noting an attorney's advice is good for everyone looking at how to hand a house down. “See what works best for your family dynamic.”

While attorneys are paid to draw up wills, Jacobs said the absence of wills can lead to higher legal expenses. “The attorneys benefit from this,” he said of dying intestate, or without a valid will. “I tell them they have to find an amicable solution. The lawyers will be paid from the proceeds.”