Risks of Deeding Your House

MAY 2019 - Risks of Deeding Your House To Your Children

So many times we have a family that comes in with a Quit Claim Deed that they have prepared in order to avoid probate, which is the court process your heirs go through after you pass away with assets just in your name.  While it seems simple enough, there are many specifications that must be met in order to properly avoid probate and avoid other possible major issues in the future.

  • Transfer Issues – Most people do not realize that when they sign a Quit Claim Deed adding their child to their home, they are actually gifting that child an interest in their property. This means that if you want to sell your home, your child would have to agree and sign at closing.  Would you want to ask your child for permission to sell your home?
  • Divorce – If your child were to go through a divorce, the court will split up assets between him/her and their spouse as equally as possible. If you did a Quit Claim Deed adding your child to your home, your home is an asset to them and would be brought into the divorce.  Your child’s ex-spouse would have a potential claim to your property.  Many of our clients say their children have been married for several years and it would never happen, but you just never know.
  • Creditors Claims – If your son or daughter is on the title of your home, your home will be subject to claims of their creditors. This means credit card companies, lending companies, and creditors claims.  Additionally, if your child is in a car accident causing injuries, your home is potentially at risk because their name is on it.  We always tell our clients that bad things happen to good people, and it just not worth the risk.
  • Bankruptcy – If your son or daughter goes through a bankruptcy and their name is on your house, the bankruptcy trustee will be entitled to his or her share of your home.
  • Inaccurate Transfers – The deed that gets prepared could be incorrect. In order to carry out the intent, the deed must include special language after the grantees names, otherwise, the deceased’s share of the home will need to be probated.  This happens often when family’s printout Quit Claim Deed forms from the internet and try to fill them out.  This mistake can be very costly and a good example of why it is always better to have an attorney draft the deed for you.
  • Income Taxes – Capital gains! This is the biggest concern, and the one we see most often.

First, capital gains tax is the difference between your basis (purchase price) and the amount you sell it for (sale price).  Now, when you sell your principal residence, you can write off the first $250,000 worth of gain.  For example, you buy your home for $100,000 and sell it for $250,000.  You will not pay any capital gains tax on the sale because the difference of $150,000 is exempt because it is your principal residence.

When you Quit Claim Deed your home to your child, he or she will take your basis in the property.  Same example, but now you did a Quit Claim Deed to your child during your lifetime.  You pass away.  Your son is now going to sell your home.  His basis in the property is your basis, which is $100,000.  He sells the home for Fair Market Value of $250,000.  Now, he will have to pay capital gains tax on the $150,000 because he took your basis and it was NOT his principal residence.  Therefore, he does not get to write off the first $250,000 worth of gain.  Now, the property did avoid probate but incurred this huge tax, which is probably more than the probate estate would have cost.

HOW CAN WE HELP?

There are other ways to avoid probate while eliminating the capital gains tax.  The key is to let a professional show you the way instead of trying to do it on your own. Call our office today at (586) 239-0871 to set up a consultation to meet with one of our experienced Estate Planning Attorneys, and let us help you protect yourself from costly mistakes.