"Should I Transfer My Home To My Kids During My Lifetime?" Good Idea/Bad Idea
by Laurier T. Raymond, Jr., Esq.
I. That’s a question I am often asked when lecturing groups interested in planning their estates. The reason behind the question is usually the desire to avoid the necessity of probate at death. Briefly speaking, I answer the question by asking five questions:
Do you want the title of your home to be in your child’s name should he/she go through a divorce in the future?
Do you want the title to your home to be in your child’s name should he/she be the defendant in a law suit which could exceed insurance coverage?
Do you want the title of your home to be in your child’s name should he/she become bankrupt?
Do you want the title of your home to be in your child’s name should he/she predecease you?
Do you want the title of your home in your child’s name should he have or develop an expensive habit, e.g.: drugs, gambling?
II. A related issue is the tax consequence of transferring real estate to the child. Everyone has a “basis” for the property they own. That “basis” is the amount they paid for the property, plus the cost of any improvements. Often, a person who purchased real estate, say 30 or 40 years ago, did so at a very low price and the increase in its value may be ten or twenty times that amount.
If the person sells the property, there could be a capital gain to report. It would be the amount received as profit – the difference between the basis and the sale price. Today there is often a big difference between the two. However, if the property is his principal residence and he has lived there for two years, there is an exclusion available.
Unfortunately, when a person transfers a property to a child without consideration, the child acquires the same basis as the parent. If the child sells the property (and it is not his residence), there could be a substantial capital gain to be reported by the child because of a low basis. In addition, there may be Federal Gift Tax consequences to the parent.
If the child obtains the property after death through a Will, or by inheritance, the child gets a “stepped-up basis”. This means that the child’s basis would be the fair market value of the property on the date of death of the parent. Therefore, the capital gain issue is less of a burden if the child later sells the property. Of course, in the interim, if the child has made the property his principal residence and has lived there for two years there is an exclusion available. Therefore, if the parent has a taxable estate, there could be Federal Estate Tax implications as to whether the property was given away or held until the parent died.
The transfer of property by gift during the parent’s lifetime or the transfer of the property at death have both risks and benefits. An attorney or an accountant should be consulted before such a transfer is made.