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How do we transfer ownership of our property from us if we still have mortgage on it?

We have a house that still has a mortgage we are in out late 50th and still have about 1/3 to go on the mortgage. We are not in great health and are concerned that we will end up in nursing home. We would like to transfer ownership of our house our of our name to our kids but it we still have a mortgage and do not own the house outright. What is the best way for us to do accomplish this now? Thank you

Dec 25, 2013 by Nelly from Newton Centre, MA in  |  Flag
2 Answers  |  4 Followers
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4 votes

Hi Nelly,

Happy Holidays to you!

Typically when title to a property is transferred before the mortgage is paid off, the Lender then has the right to demand the entire outstanding mortgage balance be paid in full. Check for a "Due on Sale" clause or similar language in your mortgage documents.

It may be possible that your Lender would be cooperative but, in all likelihood, they would need to approve your child(ren) for mortgage purposes.

Another thing: be aware of the five-year Medicaid "look back" period. For example, if you transfer ownership of your home to your children, and then three years later need long term care but have no other assets/resources to pay for it, Medicaid will deny you benefits until the five year period is up.

If you decide to move forward with such a plan, I recommend you first discuss it with an attorney who is knowledgeable in Medicaid Planning.

Good luck and best wishes for 2014!

Comment   |  Flag   |  Dec 25, 2013 from Clackamas, OR

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4 votes

Hello Nelly,

I’m sorry you are having health issues. You are smart to plan now before you get too close to the time when you may have to enter a nursing home.

I agree 100% with Larry’s advice but would like to also give you an alternative to an outright transfer of your home to your children. The outright transfer has some risk in that you will be left with no ownership. The home could one day be lost if your children run afoul of creditors or divorce their spouse. Also an outright transfer could maximize the period of ineligibility for Medicaid if you apply for Medicaid within 60 months of the transfer. Lastly an outright transfer may maximize income tax consequences for your children.

If you follow Larry’s advice and are able to facilitate the transfer of both the title and the mortgage to your children you should consider adding language to the deed that transfers the house to your children but also creates a life estate in the home for you and your spouse. With a life estate you will be able to continue to live in the home and the home will not be subject to claims made by your children’s future creditors or an ex-spouse.

The life estate may also reduce the period of time you will be ineligible to receive Medicaid benefits because the house “remainder” value amount for purposes of Medicaid should be much less than the value of the entire home in an outright transfer.

Also, for purposes of income tax, the life estate will allow your children to receive a “stepped-up” basis in your home upon your deaths. If you transfer assets to your heirs at death, under current law, the cost basis in these assets is their value on the date of your death. So if your heir sells the property the next day after death they will recognize no gain or loss for tax purposes. However, if you transfer an asset during your life then your cost basis transfers to your heir so that when they sell the house they will have taxable gain on the difference between what you paid for the house and what the house is sold for.

If you consider a life estate please work with an experienced Elder Care or Medicaid Law attorney in your state of residence. There are other considerations, pro and con, and you should work with someone who knows all of the details and how they apply to your personal financial situation.

I hope this helps. Happy New Year.

1 Comment   |  Flag   |  Dec 26, 2013 from Woodbridge, VA
Larry McClanahan, CFP®, ChFC, CLU, CASL

Excellent additional thoughts regarding life estate! John has my "up-vote" on this response.

Flag |  Dec 26, 2013 near Clackamas, OR

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