It may sound like a great idea to trans- fer your home or vacation home to your children’s names so that the property isn’t subject to Medicaid or estate taxes. But before you do this, it is important to sit down and really think it out. Are there any pitfalls in doing this? Is there another way to accomplish what you want to do?
This article will explore the pit- falls that can result if you transfer your property to your children outright. However, please note that these pitfalls can be avoided with proper estate planning in place. The use of trusts for example can help alleviate all of the below. So, what are the pitfalls with transferring property to your children outright?
There are many pitfalls:
1) By making this transfer you no longer own the property, your kids do. You need to be okay with this and with the idea of potentially renting the property if you want to continue using it.
2) By transferring the property into your children’s names, you are exposing the property to any creditors the children may have (now or in the future). If one of your children gets sued for instance, the property is now exposed to pay for any liabilities.
3) By transferring the property outright to your children without receiving a fair market value payment in return, there are tax implications that should be considered. If the value of the property is much higher at the time yo u transfer it to your children than when you bought it, your kids may have a steep capital gains tax to pay when they go to sell the property. Additionally, you may have lost out on utilizing your Sec. 121 capital gains exclusion if the property was your primary residence.
What happens when…
4) What happens if one of the kids wants to sell the property and the others don’t? What happens if the kids differ on how to use and maintain the property? Transferring outright to the kids without a way to manage these situations can create friction in the family.
5) What happens if one of your children dies co-owning property with their siblings? A probate situation may result that again causes friction and creates unneeded expense. Additionally, a portion of the property may end up in the hands of someone you did not originally intend. An example may be illustrative of this. Take the example of parents gifting property to their children. The children then own the property outright as tenants-in- common. Each child has a divisible interest in the property that can be transferred to someone else. Now assume that the children decide to sell the property, however prior to the sale, one of the children dies. A probate will need to be opened so that the property can be sold. This will likely cause a delay in selling the property as well as creating an additional expense because of needing to go through the probate process. Then of course there’s the added friction among family member s in dealing with this. Finally, the deceased child’s portion of the property is now owned by whomever that child designated in their estate plan (this may be contrary to what you had wanted).
Now what happens?
So, what can you do to avoid the above? Sit down with an estate planning attorney who can walk you through your options and help you plan so that you can still transfer the house, but in a way that will be the most effective both from a tax perspective as well as from a family harmony perspective. You ca n still accomplish your goal, but it generally needs more planning than just transferring your property to the kids outright.
