Q: Do my parents need to update their will if they gift me the house?

A: Your parents need to consult with an elder law attorney before they make a lifetime gift of the house to you. Doing that could have negative consequences for them AND for you.

For them it could cause a hefty Medicaid penalty period. And you would lose the step up in basis at death.

A: Never gift away large assets!

This is all about your tax basis in the asset. The tax basis is the amount the IRS uses to figure out your profit when you sell, so they can tax the profit. Usually, this amount is the purchase price.

If you give someone an asset, you also give them your tax basis (which is a bad thing). If I paid $100,000 for my house many years ago and now it is worth $1 Million, then there is a $900,000 gain waiting to be taxed when I sell (at maybe 20%). If I give you the house, I also give you the $100,000 tax basis (my purchase price) and when you sell the house YOU will have to pay the tax on the $900,000 gain.

What you want is to pass the house through inheritance (a Will or Trust). When I pass the house to you after my sad and untimely death, then your tax basis is NOT my tax basis. Your tax basis is “stepped up” to the current value ($1 million in our example) so that no one ever pays tax on that $900,000 gain (which is a good thing for you; the government would probably just blow the money on something stupid).

For your parents, they need to get a trust to protect the house from medical costs and pass the property to you without Probate and without that tax burden.

A: Yes, your parents should update their will to reflect the gift of their house to you. This change in property ownership represents a significant modification to their estate, and having an outdated will could create confusion or legal complications later.

When property mentioned in a will is given away during the owner's lifetime, it's important to revise the estate planning documents to match the new reality. If your parents' will still lists the house as an asset to be distributed, this could lead to misunderstandings among beneficiaries or require additional legal work to sort out after they pass away.

Consider working with the same attorney who drafted the original will to make these updates. They can also advise on any potential gift tax implications and ensure all necessary property transfer documents are properly prepared and filed. This will help protect everyone's interests and ensure your parents' wishes are accurately reflected in their estate plan.