At the beginning of many free initial consultations, I am often presented with a question similar to this, “If I just deed my house to my kids, then I can avoid Probate, right?”
My answer is, “ Yes, that can potentially happen, but this is what else can potentially 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 little reward.
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 belongs 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 facets to it, although every potential outfall cannot be presented to you here, I will bring up the most frequent. If you kids own your home and your relationship turns negative, you can’t revoke their ownership of your home. Actually, they can make you leave the house because they now own it.
But, you aren’t worried about that ever happening right, so what else do I have for you? Good question. If a creditor ever goes after your child, that creditor can attach to your house, make your child sell it, and the creditor can take the proceeds from that sale. Where does that leave you? But, your kid is good with money, so that won’t be a problem. Here are two common sources of creditors that don’t concern the ability to handle money: 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 it the home, so you will be forced out of your home.
- 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 a year, every 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.
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 (ie kids kick you out, or their creditors do), and it can potentially cost them in capital gains tax. The risk is too high for this little reward. But, if avoiding probate is something you believe you must do, why not creating 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 Jeppesen Law today at 208-477-1785 to set up your Free Initial Consultation to talk about the alternatives to deeding your home to your kids, or how you can avoid probate.