Handing Kids Keys to Your Home Is Never Good Estate Planning
The Dangers of Transferring Home Ownership to Adult Children
“Adding an adult child to your house deed, or giving them the home outright, might seem like a smart thing to do. It usually isn’t.”
Transferring ownership of the family home to an adult child may seem like a simple approach for avoiding having the house go through probate, or even qualifying easily for Medicaid. However, this seemingly simple solution comes with many problems, including taxes and the potential for years of delay for qualifying for Medicaid. That’s the advice from the article “Don’t Give Your Adult Kids Your House” from Nerd Wallet.
There are many other ways to transfer a house to family members. Estate planning lawyers will be able to help you accomplish this, without creating extra problems for your family.
Tax Implications and Loss of "Step-up in Basis"
First, if you leave the house to your children in your will, which means they don’t get it until you die, they receive something called a “step-up in basis.” This means that all of the appreciation of the house that occurred during the time that you owned the house until your death is not taxed.
Here’s an example. A financial planner advises his client not to let his mother gift him the family home. She paid $16,000 for it back in 1976, and the current market value of the house was close to $200,000. None of that increase in value would be taxable if the son inherited the house. However, she signed a quitclaim to give her son the house while she was living and died shortly afterwards. The estimated tax bill was about $32,000.
Some families who realize the impact of this when it’s almost too late, scramble to give the house back to the parents. They do a last-minute deed change, before it’s too late. There isn’t always time for this.
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