Transferring home to child may be a wonderful idea but your execution of the plan may need tax planning and understanding of other estate planning issues.
Q: I have a question about transferring my home to my children. I have a house that I plan to leave to my daughters in my will. I realize that this route will mean going through a probate which is both a time consuming and expensive process. I’m also aware that a living trust would allow me to transfer the ownership of the home to my kids without probate.
However the house is all I own, so creating a trust makes no sense to me. I was wondering what would be the best way to leave the house to my daughters. I want to avoid the probate process.
Advance Planning is key before transferring home to child
A: We’re glad you’re thinking and planning ahead. Transferring home to child will require tax and estate planning considerations. From the legal perspective, you own your home and your home is in your name. Once you die, the home is still in your name in the land records where the home is located. The land records office won’t change the name of the owner just because you died. The office will need some legal process for changing the ownership from your name to your daughters’ names.
How a will can help you
The typical way to take care of that transfer of ownership is to open a probate case. Probate court is there to assist in the disposition of property owned by people who have died. If you die with a will, the probate process will allow for the properties mentioned in the will to end up in the name of the designated people. If you die without a will, the laws in your state will determine who should end up with the properties you owned. At the end of the probate process, the title to your home would end up transferring to the new owners. It would be at this time that you’d have a document filed with the land records office showing that change of ownership.
How Probate can affect your decisions
You mentioned that probate can be expensive. That’s true. The process can be involved, and that typically means hiring an attorney who will charge your estate quite a lot. The probate attorney will have to file documents with the court to open up the probate. Then they have the probate court accept a person to act as the lead person. The court will authorize this person to sell the properties owned by the estate. Lastly, you have to make a final accounting to the court of what has happened to close out the estate.
In your situation, if you only have this one property, you could spend quite a bit of time and money to simply transfer ownership from your name to your daughters’. The other option, which you seemed to have dismissed outright, would be for you to set up a simple trust that would own your property today. You’d create the trust and transfer the title to the home from your name into the trust. Upon your death, the property would remain in the trust. The trust document would name your daughters as the successor trustees and beneficiaries in the trust. Upon your death, they would automatically own the property. Trusts can be flexible and easy to open.
Transfer on death instruments
The third option might be to file a transfer on death deed. If it’s available in your state, a transfer on death deed would work to essentially transfer ownership of the home from you to your daughters effective as of your death. There are downsides to this type of document as it is static. This means that things can change in your life and you might want to make changes to the document but that would require a whole new document.
Also, some title companies don’t like these documents as the process of using transfer on death documents is not a true and tried process. These companies wonder what effect bankruptcy, liens and other title matters have on the filing of the documents and the effect they may have on the effectiveness of the document at a future date.
Joint tenants with rights of survivorship
A fourth option, one that we don’t like as much, is to place your kids on title with you. If you do, you’d probably all be joint tenants with rights of survivorship. Upon your death, your daughters would become the sole owners of the home. However, there are federal income tax consequences to this transfer. Your daughters would become owners of the home by gift when you put them on title.
When they sell the home, they may have income taxes to pay on the profits made from the sale of the home. Likewise, when they inherit the home by will or by trust, they inherit the property at its value when you die. Say the home is worth $250,000 at the time you die and they sell it for $250,000, your daughters would pay no tax on the sale.
Federal income tax issues
Unfortunately, if you add them to the title now, the tax issue becomes more complicated. Suffice to say that if you purchased the property many years ago for nearly nothing, they may have a substantial tax to pay when they sell the home for $250,000 after you die. Now if you purchased the home for $250,000 and they sell it for $250,000, they won’t have to worry about paying taxes as there would be no profits on the sale.
An estate planning attorney can walk you through each of these options. You can then see the likely short and long-term expenses, and decide which way to go.
Good luck and let us know what you decide to do.