Transferring your house to your child while you are still alive might seem like a straightforward strategy to avoid probate after your passing. However, this approach can lead to a myriad of issues that you may not expect. My advice is do NOT do it. Some people decide to just add their child onto the deed with “right of survivorship” to skip the probate process. Both of these ideas can have detrimental effects. In this blog, we will delve into the reasons why you should Not transfer your house to your child while you are still alive. 

 

Loss of Control Over Your Property

One of the most significant downsides of transferring your house to your child is the loss of control. Once the property is in your child’s name, you no longer have the authority to make decisions regarding it. This means your child can sell the property, rent it out, or even take out loans against it without your consent. Such actions could lead to scenarios you may not agree with, including the possibility of your child mismanaging the property or making decisions that could adversely affect your living situation. Even if you simply add your child to the deed, they still have the opportunity to force a sale of the property. This is known as a partition action.

Tax Implications of Gifting Property 

Transferring your home can have unintended tax consequences for both you and your child. When you give your child the property, they typically receive it at your original purchase price, not its current market value. Even if you just add them to the deed, you are gifting half of the house to your child. This can lead to significant capital gains taxes when they eventually sell the house. However, if your child inherits the property, the cost basis is stepped up to the fair market value at the time of your passing. As a result, any appreciation in value that occurred during your lifetime isn’t subject to capital gains taxes.

For example, if you purchased your home for $200,000 and it appreciates to $500,000 by the time your child sells it, they could face a capital gains tax on the $300,000 difference. If your child inherits the property after you pass, they inherit at the current market value. Your child would inherit the house at $500,000 and if they sold it at $500,000 there would be no capital gain and no taxes owed. 

Moreover, transferring the property may also affect your tax exemptions and deductions, leading to a more complicated financial situation than anticipated. It’s crucial to consult with a tax professional to fully understand the implications of such a transfer.

 

Exposure to Your Child’s Creditors

Another concern is the potential exposure of your house to your child’s creditors. If your child encounters financial difficulties, such as bankruptcy or lawsuits, the house you transferred to them could be seized as an asset to settle debts. This risk can jeopardize your living situation and stability, especially if you rely on the property as your primary residence.

 

Medicaid Eligibility Complications

If you ever need long-term care and plan to rely on Medicaid, transferring your house to your child can complicate your eligibility. Medicaid has a five-year look-back period, meaning that any assets transferred during this time can disqualify you from receiving benefits. If you need nursing home care shortly after making the transfer, you may find yourself ineligible for assistance, leading to significant out-of-pocket expenses.

 

The Probate Process: Understanding Its Role

While the intention behind transferring your house is to avoid probate, it’s essential to understand that probate is a legal process designed to ensure debts are settled and assets are distributed according to your will. While it can be time-consuming, it also provides a structured approach to estate management. Furthermore, not all assets go through probate, and there are various ways to streamline the process without resorting to outright transfers.

 

Alternative Solutions for Estate Planning

Instead of transferring your house to your child, there are several alternatives that can help you maintain control while planning for the future:

Revocable Living Trusts: This allows you to place your assets in a trust while retaining control over them during your lifetime. Upon your death, the trust assets can be distributed to your beneficiaries without going through probate.

Beneficiary Deeds: Arizona allows for beneficiary deeds, which allow you to name a beneficiary to inherit your property automatically upon your death. This helps to avoid probate and may be beneficial, especially if you only have one child that will inherit your house. There are a few risks to consider when using a beneficiary deed.

Make an Informed Decision

Before you decide to gift your property to your child or add your child to your deed, be sure to get all the information you need to make a smart, educated decision. As a mobile estate planning attorney, I’ll come to you. Schedule an appointment today to discuss your estate planning needs and ways to avoid probate by clicking below.