When you have owned a property for years—whether it is your family home or an investment property—it is understandable to want to pass it on to your children. If one of your kids has been particularly helpful in caring for you over the years, you may consider transferring the property title to them or adding them to the deed. However, before you take this step, it is essential to understand the potential pitfalls and tax consequences of transferring property to your children. In this post, we’ll explore why it’s often not the best idea to put your child’s name on your property deed simply and how a revocable trust could provide a better solution for transferring property in a way that minimizes complications.
The Hidden Tax Consequences of Transferring Property to Your Children
When thinking about transferring ownership of real property, it is crucial to consider the tax basis of that property. The tax basis refers to what you originally paid for the property. Transferring the title to your child does not change the tax basis. However, if you hold onto the property until your death, the property will receive a step-up in basis, meaning its value is reassessed at fair market value as of your date of death.
This step-up in basis is a huge tax advantage. If your children inherit the property, they can sell it immediately without paying capital gains taxes on any appreciation during your ownership. Without this step-up, they would be responsible for paying taxes on the difference between the sale price and your original purchase price—potentially a significant amount, especially if the property has appreciated substantially over time.
The long-term capital gains tax rate can be as high as 20%, so retaining the property until death could save your children thousands of dollars in taxes. Instead of transferring the title directly to your children, a better approach is to hold the property within a revocable trust, which allows you to maintain control while still planning for the future property transfer to your heirs.
Why Adding Your Kids to the Property Title May Not Be the Best Idea
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- Medicaid Planning Complications If you’re considering adding your child’s name to the deed to avoid probate, there’s an important caveat to consider: it could negatively impact any Medicaid planning you’ve done or plan to do. Medicaid eligibility can be affected by the transfer of assets, and in some cases, it could disqualify you from receiving benefits. While we do not offer Medicaid planning services, we do refer clients to specialists, and it is important to understand that adding someone to your property title could complicate your ability to qualify for Medicaid when needed.
- Potential for Personal or Legal Issues Another risk of adding your child to the title is that it opens the door for personal or legal issues. If your child goes through a divorce, experiences financial problems, or is involved in a lawsuit, your property could become entangled in those issues. You could lose your interest in the property or, at the very least, face complications regarding its ownership.
- Loss of Control Over the Property When you add a child to the title of your property, you become a co-owner with them. This means that you will need their approval for decisions related to the property, such as selling or refinancing. If your relationship changes over time, or if your child’s circumstances change (such as financial problems or divorce), it could lead to disputes or restrictions on your ability to manage your property as you see fit.
- Impact on Homestead Exemption If your property is your homestead, transferring ownership to a child could affect your homestead exemption. In some states, this could reduce the exemption you are entitled to, increasing your exposure to taxes or leaving you with fewer protections.
The Advantages of Using a Revocable Trust for Property Transfer
Instead of transferring property directly to your children, consider using a revocable trust as an alternative. A revocable trust allows you to maintain full control of your property during your lifetime. You can designate in the trust how the property should be distributed after your death without having to worry about complications arising from co-ownership or tax liabilities.
Some of the key benefits of transferring property to a revocable trust include:
- Avoiding Probate: Property in a revocable trust passes directly to your heirs without the need for probate, which can be time-consuming and expensive. This allows for a smoother transition of ownership.
- Step-Up in Basis: As mentioned earlier, a revocable trust ensures that the property will receive a stepped-up basis upon your death, reducing potential capital gains taxes for your children.
- Protection from Legal Issues: Since your children will not be co-owners of the property during your lifetime, you can avoid the risks associated with their personal or financial troubles. Your property remains fully under your control until you pass.
- Flexibility and Control: You maintain full control of the property and can change the terms of the trust as needed, ensuring your wishes are followed without complications.
The Importance of Planning Ahead for Property Transfer
While it might seem like the simplest option to add your child to the deed of your property to avoid probate or pass the property down, this approach can introduce a number of issues that you may not have considered. From tax consequences to potential legal problems, transferring property directly to a child can complicate your financial and estate plans.
The better solution in most cases is to transfer the property into a revocable trust. A trust provides the flexibility and control you need while avoiding the complications of direct property transfers. By using a revocable trust, you can ensure that your property is passed down to your heirs in the most tax-efficient way while also protecting it from future legal issues.
If you’re considering transferring property to your children or want to explore your estate planning options, contact us today. Our team can help you navigate these complex issues and ensure that your property is transferred according to your wishes, without unnecessary complications.
Contact Barbara Pizzolato Today
If you need assistance with estate planning, we are here to help. Let us guide you through the best options for managing your real property and ensuring a smooth transfer to your heirs. Contact us to schedule your consultation.
