A client recently came to my office with what he believed was a simple, elegant plan. “Russel,” he said, “I’m going to sign the deed to my Brooklyn brownstone over to my son. I want to get it out of my name to avoid estate taxes.”
I hear this sentiment often. It comes from a good place—a desire to be a prudent steward of family assets and to create a smooth generational transfer. The logic seems sound: if you don’t own the house when you pass away, it can’t be part of your taxable estate. While that part is technically true, this seemingly straightforward gift can unravel into a tangle of unintended and often irreversible consequences. The act of simply changing a name on a deed is one of the most financially dangerous moves a family can make without proper counsel.
The Loss of Control Is Immediate and Absolute
The moment you sign and deliver that deed, the house is no longer yours. Under New York Real Property Law § 244, a grant of property takes effect upon its delivery. This is not a legal fiction; it is a stark reality. Your child, as the new owner, has complete control. They can sell the property, take out a mortgage against it, or use it as they see fit—without your consent.
I’ve seen this go wrong. What if your child goes through a contentious divorce? That home, which you intended as a family legacy, could become a marital asset subject to division by a court. What if they have financial trouble or are sued? The house is now exposed to their creditors. You may trust your children completely, but you cannot control their future circumstances. Gifting your home outright is a gamble on their life remaining stable and free of conflict. That’s a contingency many are not prepared to underwrite.
Unpacking the Tax Consequences
People initiate this transfer to avoid taxes, but they often trigger a different—and sometimes worse—tax problem. The issue is capital gains.
When you gift a property to your child during your lifetime, they also receive your original cost basis. Let’s say you bought your home decades ago for $100,000 and it’s now worth $1.5 million. Your cost basis is $100,000. If you give it to your child and they later sell it for $1.5 million, they will face capital gains tax on the $1.4 million profit.
Contrast this with what happens if they inherit the home. Under federal law—specifically, 26 U.S.C. § 1014—the property’s cost basis is “stepped up” to its fair market value at the time of your death. In our example, their basis becomes $1.5 million. If they sell it immediately, their taxable gain is zero. By trying to solve a potential estate tax issue, you could create a definite income tax burden for your children.
The Five-Year Shadow of Medicaid
Long-term care planning introduces another critical factor. If you need to apply for Medicaid to cover nursing home costs, the state performs a “look-back” to see if you have transferred assets for less than fair market value.
In New York, that look-back period is five years. Gifting your home starts a five-year clock. If you apply for Medicaid within that window, the value of the gifted property can be used to calculate a penalty period during which you will be ineligible for benefits. This well-intentioned gift can suddenly jeopardize your ability to pay for essential medical care, forcing your family into an incredibly difficult position. The idea was to protect an asset, but the action ends up creating a far more immediate crisis.
A More Intentional Path: The Role of a Trust
There is a more deliberate way to handle real estate in an estate plan that avoids these pitfalls. Instead of an outright gift, we often work with families to place the home into a properly structured Irrevocable Trust.
This approach allows for far more control and foresight. A trust can be drafted to allow you to live in the home for the rest of your life. It can protect the property from your children’s future creditors or divorce proceedings. It can name a responsible trustee to manage the asset according to your specific wishes. For many types of trusts, the home can remain in your estate for tax purposes, which preserves that crucial step-up in basis for your children. It achieves the goal of asset protection and management without the significant tax and personal risks of an outright transfer.
Stewardship is about making intentional choices, not just quick moves. Before you transfer any property, your first step should not be to a notary, but to a quiet room to think through the long-term effects. If you’re considering how best to pass on your home, we can begin with a review of your property’s deed and a discussion of your family’s specific circumstances to map out a prudent path forward.
