I am often asked the question, or some similar variation of: “Why can’t we just convey our house to our kids now rather than waiting until after we die? Won’t we avoid probate that way if we just add our children as owners to our house?”
The answer(s) to such question(s) are not a clear “yes” or “no.” Many reasons may exist why parents think that they should transfer their home to their adult child or children during their lifetime, rather than leaving their home to their child or children at the time of their death. For example, maybe the parents believe they can protect their home from probate. Generally, however, adding a child’s name to a deed purely to avoid probate is likely an insufficient rationale to justify the transfer. Please “beware,” as I have seen countless times the situation where a parent prepares their own “form” deed believing they have added their child as an owner with them, only for me to have to inform the parent that they actually conveyed their entire home to their child, meaning the parent no longer has legal title to the home.
There are also tax implications to consider before conveying real estate during the parents’ lifetime. For example, if the parent conveys the home during their lifetime, the child’s basis in the property would be the same as the parents’ basis (carryover basis), potentially creating large capital gains taxes to be paid upon sale of the property (i.e., if the parent bought the home for $100,000 forty years ago and the home is valued at $450,000 on the parent’s date of death, the basis remains at $100,000 for the child). In contrast, if the child were to inherit the home after the parent’s death, the child would receive a step-up in basis (i.e., the $450,000 value as of the parent’s date of death).
Further, consider the situation where the parent adds a child as a joint owner to their home, only for the child to later go through a divorce; meaning the parents’ home may now be subject to that divorce proceeding. That is, if the child owns the home along with the parent and the child has liability/creditor issues, that asset is available to satisfy the child’s debts.
Please, before making a big decision that could affect you and your estate, contact an estate planning attorney to address the pros and cons to the transfer. Seeing your transactional attorney now, rather than waiting until the unintended problem arises, saves you cost, time, and worry. Contact Shaina A. Case for questions or to schedule a meeting.