“Can I avoid probate if I give my house to my kids?”
Have you thought this before?
You probably have, because I receive this question often.
My answer is, “Yes, you can potentially avoid probate by giving your home to your kids, but here is a list of other things that can potentially happen or will happen.” And I proceed to explain to the client exactly what else CAN happen and let them decide if they want to take that risk, because it is a huge risk with a very small reward.
Why is avoiding probate a small reward?
Currently, Idaho is very much a probate-friendly state. Or another way to state it, probate in Idaho is not something that absolutely needs to be avoided.
These are typically the two main considerations against deeding your home to your kids solely to avoid probate court:
First, if you deed your house to anyone, your kids included, they own it. That seems obvious, but THEY own it and all the powers, risks, and obligations of owning property now belong to them and NOT you; and
Second, if you gift the property while you are alive and your kids sell it when you pass away, this may increase the taxes due when they sell “your” home.
The first problem has multiple implications, and every potential outcome cannot be presented here. That said, I do want to cover the most pressing concerns that I perceive.
If your kids own the home you live in and your relationship becomes strained, you can’t take back the gift of ownership of your home. Actually, they can force you move out because they now own the residence.
But, you aren’t worried about that ever happening, right? So, what else do I have for you?
If a creditor ever goes after your child for an unpaid debt, that creditor can attach said debt to the house and then make your child sell the house and use the proceeds from that sale to cover the debt.
Where does that leave you?
But, you say, my kid is good with money so that won’t be a problem.
Here are three common sources of creditors that don’t concern the ability to handle money: health care, accidents and divorces. And, because your kids own the home and do not live in it, there will not be a Homestead exemption applicable for the equity that you had in the home, so you could be forced out of your home during your lifetime.
- A side note: if your kid owns the home, you will be ineligible to apply for the property tax exemption called the Homeowner’s Exemption. This alone can cost you around $1,000-$2,000 per year for the rest of your life.
The second problem is a fear of long term capital gains tax. Without getting into taxes, let’s just say that a home passed through a Will or Trust, and sold shortly thereafter, will avoid this type of tax. This can oftentimes be in excess of $10,000, $20,000 or $30,000 dollars in capital gains tax.
Even though deeding your home to your kids seems like a good, cheap alternative to creating a Will or Trust, in the end it costs you more (no more homeowner’s exemption), it can potentially cost you everything (i.e. kids kick you out, or their creditors do), and it can potentially cost them in capital gains tax.
The risk is too high for such a small reward. But, if avoiding probate is something you believe you must do, why not create a Trust? By doing so you can avoid the above risk, avoid probate, and save yourself thousands of dollars on future homeowner’s exemptions filings.
Call Justin Jeppesen today at 208-562-4891 to set up your Complimentary Consultation to talk about the alternatives to deeding your home to your kids, or how you can avoid probate.