The best of intentions can lead to the worst of results. With some frequency, an older person will place his or her child’s name on title to their house. The goal is to avoid probate and to smooth the transition in ownership. However, it is not advisable for a number of reasons.
First, probate isn’t bad. Barring unforeseen circumstances, the entire probate process should take less than six months. The fees and costs are dependent upon the size of the estate, so it is always financially feasible to go through probate.
Second, giving someone a house is a gift. Under the current laws, a person can give up to $13,000 per recipient per year. If the value of the property is more than that, a gift tax return is due.
Third, there is a capital gains tax problem. When a person inherits assets, he or she also inherits the decedent’s date-of-death value as the basis. This is commonly called the “stepped-up” basis and is designed to prevent people who inherit property from paying capital gains tax. But with a gift, the basis is the donor’s basis. This may mean that there is a very large difference between the acquisition price and the sales price, resulting in a large capital gains tax bill.
Fourth, there are liability issues. The judgments and liens of all titleholders attach to real estate they own. If your house is your homestead, there is a general exemption from liability. But if you add a non-occupant to title (like your children), all of their liabilities attach and can be enforced against title to your home.
Finally, there are sometimes practical problems with multiple titleholders. If you want to sell your home, all titleholders and their spouses must agree to and participate in the conveyance. If all titleholders are in agreement, there may still be logistical problems in circulating the documents for everyone to sign. If titleholders squabble or don’t get along with each other, the issues can usually only be resolved after lengthy and expensive litigation.
It is much better practice to prepare a last will and testament, directing the division of your assets. You can also create a revocable trust to hold and manage your property. Inheriting real estate eliminates the gift tax, capital gains tax, and personal liability issues.
Information provided by Ross Barnett, attorney for Abendroth and Russell Law Firm, 2560 73rd St., Urbandale, 278-0623, www.ARPCLaw.com.