Mother and grown daughter standing in doorway discussing legal papers daughter is signing.
 
Should you consider adding adult children to your home title?
  • Some financial advisors recommend this...while other feel more cautious about it.
  • Will this really 'avoid probate' when you die? Even if it does, are there 'unintended consequences' to your kids?

By Janine Hook, J.D., e-Pro, CRS, SRES, ABR
Real Estate Consultant, Keller Williams Premier Partners Realty

Disclaimer: I am not an attorney in any state at this time. No statements I make here or to my clients is meant to constitute legal advice and should not be substituted for seeking legal, tax or financial advice from a currently licensed practicing professional.

Did you know that putting one or more of your adult children on the title to your house might--or might not--be the right thing to do?   There are at least three issues to consider-

1.       The effect of capital gains taxation on the children

2.       The effect if you as the parent later change your mind

3.       The gift tax reporting requirements of any large gift, such as an outright transfer of title to real estate.

 

First, the effect of capital gains: the heirs to your property will probably save on capital gains if they are not on the title as owners. 'Heirs' include those who receive the property by your legal will (or, if you die without a legal will, those who receive the property by rules set out in state law).

Here's an example:

 

Mrs. Jones bought her house at 123 Johnson St. 10 years ago for $50,000.  She signed a quitclaim deed transferring title to her house to her son Tony on December 1, 2008 when it was worth $200,000.  Tony has received the gift, which doesn't currently affect his income tax.  This probably requires Mrs. Jones to file a gift tax return for 2008.  But she most likely won't owe any tax. [See point # 3 below]

 

When Mrs. Jones dies in 2012 the house is worth $300,000.  If Tony sells the house at that time he will owe capital gains tax on the difference between his net proceeds and $50,000 (his mother's ‘basis’ in the house for tax purposes).

 

Because Mrs. Jones gave him the house while she was alive, Tony has a carryover basis in the house which is the same as Mrs. Jones's basis (or what she paid for it).

 

But if Mrs. Jones leaves Tony the house after her death, he will receive it with a basis of the value at the date of Mrs. Jones’s death ($300,000).  This is referred to as ‘stepped-up basis.’ Now If he sells the property for $300,000, his capital gain is zero, so he owes no income tax on the profit.

 

    • Leaving appreciated property to your heirs is one of the few ways to transfer property to them without giving part of it to Uncle Sam!

Second, the effect of changing your mind: If you put anyone else on the title to your property while you are still alive, you are opening up the possibility that their interests will be different than yours.  For example, your health or finances may dictate that you sell the property. Or the child may display an inability to deal with financial matters that could lead to his or her forcing a sale of the property in order to use their share (e.g., a need to pay off gambling debts).

A recent article in the Sunday Oregonian responded to a plea from an older woman who had transferred the home she lived in to her two children.  When she needed to sell it in order to move to assisted living, one of her children would not transfer his interest back to her. 

 

 

If she and/or the more cooperative child had to go to court, the recalcitrant child would be entitled to the proceeds of whatever part of the property he owned—in this case, one half.  Only if the court found he fraudulently induced her to transfer the property interest to him could she get that portion of the proceeds.  And her attorney costs would certainly exceed the cost of probate that she had hoped to avoid.

Third, the need to properly file federal gift tax returns for the year in which the transfer is made: The transfer of a home or piece of real property to another person without receiving fair market value in exchange for the property is a gift.  Gifts of any sort of property over the annual gift exclusion value (in 2008 this amount is equal to a gift value of $12,000 from any one person to any other person) will require the donor to file a gift tax return and pay gift tax on the amount over the annual gift exclusion value, unless the person making the gift files a return deducting the excess value from their lifetime federal gift exclusion (in 2008 this amount is $1,000,000). 

The excess amount will also be credited against the donor’s lifetime federal estate tax exclusion (in 2008 this amount is $2,000,000 per person and will increase to $3,500,000 in 2009). Before making a gift of real property by transferring a home or land to children or relatives, consult an accountant familiar with gift tax issues to make sure the proper gift filings will be made after the transfer. Depending on your individual tax situation you may wish to structure the transfer differently.

 

Conclusions:

1.       There are other more-effective ways to avoid probate that create fewer problems.  Among them are community property agreements, holding property as joint tenants with right of survivorship, and holding the property in a revocable living trust.  Each of these solutions also has tax consequences, so it’s a good idea to contact an attorney who is experienced in wills and trusts, even if you are still sure you want to avoid having a will and having your estate probated.

 

2.       In appropriate situations, valuable real property owned within a family can be transferred to a family- owned limited liability company or family limited partnership.  This arrangement may be a bit a more complicated to set up, but if properly maintained can have the benefits of avoiding probate and providing additional opportunities for estate tax planning. This type of transfer may be done as part of an overall estate plan using wills and trusts.

3.       If you have only Washington real property and some personal property to be distributed, it won’t cost you very much to draw up a will. Although your property would then be subject to probate, it’s very unlikely to cost as much as the taxes your heirs will save.

 

State laws: While much of this report would be applicable to people in other states, the applicable state law for this report is that of the State of Washington.

 

 

Reviewed by:  Robert Ives, attorney in Vancouver, WA. You can reach him at robives@comcast.com