Which is best? Conveying your home to your child or children now? Or letting them inherit it after you pass on? Conveying real estate during your lifetime can cost more than letting it be inherited after death. Then again, inheritances go through probate, which is time-consuming and subject to challenges. Here are more details on the ways the options play out. Choose the one that works best for you and your family.
A Threshold Question: Do You Own Your Home Now, or Co-Own It?
A threshold question is whether you own the whole property you wish to give, or share your ownership with another person. If you co-own in a joint tenancy, a tenancy by the entirety, or community property with survivorship rights, review your state’s law to make sure you follow it. Co-owners, of course, must sign the deed with you to make a valid transfer. If you are married, with few exceptions, your spouse has to sign off; spouses not named as co-owners retain the marital property rights described by your state.
If you co-own in a joint tenancy with rights of survivorship, you can’t bequeath your interest in the home through your will. Your surviving co-owner (or co-owners) will automatically own your interest after you pass on.
Find out more here about how a co-owned home title is vested and how to change this.
Transferring Title to Your Child With a Gift Deed
There are several ways to pass real estate along to an adult child during your lifetime. One way is making a gift of the house. A properly drafted gift deed immediately conveys the home for no consideration — that is, with no money or anything else expected in return for the gift. It makes an immediate delivery of the owner’s interest to the recipient, too. The conveyance can’t just be a promise that your child will get the house later. Nor can you revoke your gift.
First, be sure you child is ready for the responsibilities of homeownership. A gift of property can be refused; but once your recipient takes possession of the home, your gift cannot be contested. It’s one and done!
Thinking of gifting your home? View deed forms here.
Now, to the nitty gritty of the gift deed: the taxes. When real estate is given to people other than spouses for free (or for only token consideration), expect federal gift and inheritance taxation, plus state gift taxation, as applicable. The IRS explains it here. The IRS doesn’t regard the home’s value as income, but if your child rents out the property after receiving it, normal income taxes are due on the rental income.
Taxes can be significant if you give your home to your adult child while you’re alive and the child needs to sell the home within two years. Long-term capital gains taxes will be due — if the property has appreciated in value since your initial investment in it — on the profit made between your cost basis to your child’s sale proceeds, if you yourself owned the home for at least a year before giving it away. (If not, the gains in value are counted as income, and the income tax rate is even higher.)
Have you checked in with your accountant about your plans and the potential tax results of your gift? As you can see, it’s a good idea to do so.
Learn more about the financial effects of deed transfers here.
Putting the Property in a Trust for Your Child
Trusts are common in families that plan to pass on assets of significant value. There are two major types:
- A revocable living trust is a legal instrument you control. You can revoke the trust or change its terms at any time (until you pass on or become incapacitated, and the named trustee takes over). Though it keeps the home among your estate assets, the living trust bypasses probate — while still offering the benefit of a stepped-up tax basis. As with a will, the beneficiary doesn’t receive actual ownership rights before you pass on.
- A trust can, alternatively, be irrevocable. The assigned trustee controls the account, including the tax payments, in keeping with your goals — until you pass on and your child or children get the property. The irrevocable trust is subject neither to probate nor estate tax, but you’ll be giving up your options to refinance or otherwise take loans out on the property.
You can hold your property for your child without making a taxable gift. See more options here.
Where Allowed: The Transfer on Death Deed
Does your state allow a transfer on death deed for your home? This instrument work very much like the beneficiary forms you sign to ensure your financial accounts go to a specific person or persons when you pass on. You’ll need to complete an Affidavit of Death form, and have it notarized. The form lets the home pass to your adult child later — without leaving the process to your personal representative in probate court.
Pro tip: If you use a transfer on death deed, be sure to check with your county’s records for liens and resolve them. Liens and any mortgage payments due will become your child’s responsibility once you’ve passed on.
Which Deed? Warranty or Quitclaim?
If you decide to convey your property, review the necessary steps to create a valid deed. Then record your deed promptly (some state have strict time limits!) in the home’s county. There are two broad categories of deeds:
Warranty deed. The warranty deed will need professional support, including a title search to find outstanding liens, mortgages, defects or encumbrances. The recipient can purchase title insurance to cover many kinds of clouds on the title that a title search might miss. Hiring a real estate lawyer is recommended.
Quitclaim deed. For transferring a house to your child or into a living trust, a quitclaim is a simple solution. Note that it carries no guarantee against title defects, which you would need if you were involved in an arm’s-length transaction. For conveying real property among family, filling out a quitclaim is an inexpensive method, and at Deeds.com we’re delighted to help people get the job done. Our reliable and up-to-date deed forms comply with your state and county rules, and have the required supplemental pages. While you can do it yourself from start to finish, we recommend hiring a real estate lawyer to execute the transfer and ensure all documentation is properly filed and recorded.
Leaving Your House to Your Child in Your Will
What if you leave the house in you will? Here’s why that’s not such a bad idea. You’ll have solidly reliable transfer with probate court certification. Plus, if your child inherits and sells, there’s the capital gains break whereby the home’s value on the date of your passing becomes your child’s cost basis.
If you’re doing estate planning while your child or children are still minors, a testamentary trust can be a good move. You can write it into your will, and it will effect the distribution of your assets at the appropriate time — when the child reaches a certain age, for example. Note that there are fees for this, as the probate court will need to review the trust yearly until the assets have been distributed and the trust is closed.
Set up the trust by describing the house and other included assets, identifying the beneficiaries, and naming a trustee. Include the timing of the distribution. After you pass away, your “will trust” is irrevocable, unless the trust says the trustee can change its terms. Obviously, the trustee should act in your child’s best interests. The trustee has discretion, so pick someone reliable.
Whether you leave the home by will or thorough a will trust, you can change the terms of your bequest during your lifetime, simply by revoking your will and creating a new one.
The Importance of Planning, Expertise… And Giving
However you decide to proceed, careful planning is vital. If you have questions about any aspect of your home transfer, speak first with an attorney, your financial expert, or — better yet — both! Tax and legal provisions affect different people (and their children) differently, because everyone’s situation is unique. While we can offer general information, it is not, and should not be considered, case-specific legal advice. With that in mind, happy gifting! No matter your stage in life, giving is an important part of financial planning. Best wishes for a smooth transfer.