One of the most important assets that most people have is their home. Very often parents want to ensure that their children and/or grandchildren receive a share of this valuable asset. However, there are pitfalls to be avoided.
Giving the Property Away During Lifetime
There are three ways to give real property away during your lifetime:
1. Give the real estate directly to the beneficiaries.
2. Keep a life estate and give a remainder interest to the beneficiaries.
3. Place the property into a trust for the benefit of the beneficiaries now or in the future.
Deeding the property directly to your beneficiaries can lead to disaster. If you are hoping to continue to use the property or to live in it, you could find yourself in a situation where you lose your house. Your beneficiaries will own the house once you deed it to them and you will no longer have any rights to it.
But you say, “I trust my children. They would never sell my house out from under me or kick me out.” You may be correct about your children. However, suppose your child dies: do you trust his or her spouse as much as you trust your child? Your child could also be involved in a nasty divorce, bankruptcy, a lawsuit, or become disabled and need to rely on government benefits. All these events could put your home in jeopardy.
If you need to use the equity in your home to obtain a mortgage, you cannot obtain a mortgage on a home you do not own. In addition, when your children sell the home, they will probably expend tens of thousands of dollars in capital gains taxes that they would not have to have paid if you had transferred your home another way.
Using a life estate is somewhat better. A life estate will ensure that no one can kick you out of your house. However, your children will own the remainder interest. (The interest that remains after your death.) This interest has a value to it and if your child were to declare bankruptcy or to be sued, a creditor could attach your child’s interest in your home. In addition, if the child were to predecease you, the spouse of your child may receive his or her share of your home instead of your grandchildren. In addition, if you wish to obtain a mortgage on your home, you must get the permission of your children in order to do so.
The good news with a life estate is that, if the home is sold after you pass away, the capital gains problem mentioned above goes away. However, if the home is sold during your lifetime, your children will have to pay a capital gains tax on their share of the residence.
In most situations, the best way of transferring your home is in a trust. If you are hoping to live in the home for the rest your life, a trust can allow you to do so. You can also structure a trust to avoid the pitfalls of your children losing their inheritance by becoming entangled in a divorce, bankruptcy, lawsuit or relying on government benefits. A trust can be drafted to eliminate capital gains tax issues. A trust will also allow you to accomplish other goals that may be desirable, such as Medicaid and tax planning.
Giving the Property Away at Death
When you gift your real property upon your death, your beneficiaries could have the same problems mentioned above such as bankruptcy and divorce, which could cause them to lose their inheritance. Therefore, you may think about whether you wish to protect their inheritance by leaving the real property in trust for them.
I sometimes have clients who wish to leave a piece of property to a specific individual. When a beneficiary receives real property, he or she must pay the charges on the home, such as the real estate taxes, gas or oil, utilities and so on. Also, it costs money to sell the house. For instance, there are commissions to real estate brokers, attorney fees and transfer taxes. If there is a problem with title, the expenses will be more. Furthermore, people’s circumstances change and even if they expressed an interest in the home in the past, they may no longer want it. In addition, the neighborhood could change making the ownership of the home less desirable.
I had a client who wanted to leave her real property to her grandson. Her grandson at some point had told her how much he loved the house. I suggested to her that she speak to her grandson about whether he still wants the house. She followed my suggestion and found out that her grandson no longer wished to have the home. He and his wife were happily ensconced in a different neighborhood and had no desire to move. Furthermore, they were thinking about whether they would leave the state. The grandmother decided to leave the grandson a sum of money rather than the real property.
The gifting of real property can have many pitfalls. It is best to consult with a qualified attorney to assist you in making the decisions with respect to gifting your real property.