A client came to my office with a common but difficult problem. Years ago, he and his wife signed their Brooklyn home over to their only son, thinking it would simplify their estate and save on taxes. Now, their son is in a contentious divorce, and the house—the home they’ve lived in for 40 years—is a marital asset on the negotiating table. They are now tenants in a property caught in a legal battle they cannot control.
This family’s situation illustrates a persistent estate planning myth: that gifting your primary residence to your children during your lifetime is a simple, effective strategy. On the surface, it appears to move a major asset out of your taxable estate. In practice, this single transaction triggers a cascade of unintended consequences, from tax liabilities far greater than any potential estate tax savings to a complete loss of personal autonomy.
As an attorney who has spent my career helping families steward their legacies, I advise extreme caution. What feels like a gift can become a burden—for you and for the children you intended to help.
The Moment the Deed Is Signed, It’s No Longer Your House
The most immediate and irreversible consequence of transferring your home is the loss of control. The day you sign that deed, legal ownership passes to your children. From that moment on, the property is theirs. This is not a theoretical legal point—it has profound, real-world implications.
Your home is now subject to your children’s financial lives. If they face a lawsuit, a bankruptcy, or a divorce, your home becomes an asset that their creditors or a former spouse can pursue. You may have a wonderful relationship with your children, but you cannot predict their futures. Are you prepared to risk your home on their financial stability or marital harmony? Stewardship means protecting assets, not exposing them to new and unnecessary risks.
Furthermore, you lose all decision-making authority. If you want to sell the house and downsize, you need your children’s consent. If you want to take out a home equity loan or a reverse mortgage to fund your retirement, you no longer have the authority. You are living in someone else’s asset, and your ability to adapt to life’s changing circumstances is severely constrained.
Trading an Estate Tax for a Capital Gains Tax
Many people pursue this strategy to avoid estate taxes. The financial logic, however, is often flawed, particularly in New York. First, very few estates are subject to estate tax. For 2024, the New York State estate tax exemption is $6.94 million per person. If your total estate is below this threshold, you have no state estate tax liability to begin with, making the transfer of your home an unnecessary risk.
More importantly, by gifting the home, you create a significant income tax problem for your children. This centers on the tax concept of “cost basis.”
When you gift a property, the recipient—in this case, your child—also receives your original cost basis. This is, roughly speaking, what you paid for the house, plus the cost of any capital improvements. If you bought a home in Manhattan decades ago for $100,000 and it’s now worth $2 million, your basis is low.
Contrast this with what happens when a child inherits a property. The tax code allows for a “step-up in basis.” The child’s cost basis becomes the fair market value of the property on the date of death. If the house is worth $2 million when they inherit it, their basis is $2 million. If they sell it immediately for that price, their capital gain is zero, and so is their tax bill.
By gifting the house, you deny your child this crucial tax benefit. If they sell the house you gave them, they will owe capital gains tax on the entire difference between the sale price and your original low basis. This tax bill could easily reach hundreds of thousands of dollars, far exceeding any estate tax you might have saved.
The Five-Year Shadow: Medicaid and Long-Term Care
Another significant risk involves planning for long-term care. The cost of nursing home care is astronomical, and many New Yorkers eventually rely on Medicaid to cover these expenses. To qualify, you must meet strict asset and income limits.
When you apply for Medicaid, the state performs a “look-back” to see if you transferred any assets for less than fair market value. In New York, this look-back period is five years for nursing home care. Gifting your house is a transfer that starts this five-year clock.
If you need to apply for Medicaid within five years of gifting your home, the value of that gift will be used to calculate a penalty period—a length of time during which you are ineligible for benefits. This could force your family to pay out-of-pocket for your care for months or even years. An act meant to preserve an asset could end up jeopardizing your access to essential medical care.
A More Prudent Path Forward
There are far more effective and less risky ways to manage a primary residence within an estate plan. Tools like Irrevocable Trusts or Qualified Personal Residence Trusts (QPRTs), governed by New York’s EPTL Article 7, can help achieve tax objectives while providing creditor protection and allowing you to retain control over your living situation. These are intentional, deliberate structures designed for these specific goals.
Simply signing over a deed is a blunt instrument that creates more problems than it solves. It is rarely the prudent course of action for the families I represent.
Before making any irreversible decision about your most significant asset, the correct first step is a comprehensive review of your family’s financial landscape. We often begin this process with a generational asset review, which allows us to map out your goals and assess the strategies—and the legal instruments—that will serve your legacy instead of undermining it.
