Being in the position to give your children or child ownership of the family home, keeps the house in the family and is a financial blessing for the family member. However, it’s important to note that this kind of a transaction needs the guidance of an estate planning attorney in order to make sure that it goes right, because every situation is different. These are general guidelines that can help get you started.
If you add another person, i.e., an adult child, as a joint tenant on your home, then you each have an equal ownership interest in the house. When one of you passes, the other owns the entire property and there is no need for probate. But there are some risks, according to a recent article, “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home? in elderlawanswers.com.
One disadvantage of joint tenancy is that creditors can attach the tenant's property to satisfy a debt. In such a case, if a co-tenant defaults on his or her debts, the creditors can sue in a partition proceeding to have the property interests uncoupled so the property can be sold, even over the objections of the non-debtor owner(s). What’s more, without a creditor issue, one co-owner of the property can sue to partition the property and can force another owner to move out.
Joint tenancy can also impact the capital gains treatment of the property. When you give property to a child, the tax basis for the property is the same price for which you purchased the property. However, inherited property receives a step up in basis. This means that the basis would be the current value of the property. When you pass, your child inherits your half of the property—one half of the property will receive a step up in basis. However, the tax basis of the gifted half of the property will be the same as the original purchase price. If your child sells the home after the parent dies, he or she would have to pay capital gains taxes on the difference between the tax basis and the selling price. To avoid this tax, the child must live in the house for at least two years before selling it. When that happens, he or she can exclude up to $250,000 ($500,000 for a couple) of capital gains from taxes.
If you place the property in a revocable trust and name yourself as the beneficiary and your child as the beneficiary after you die, the property will go to your child without going through probate when you pass away. A trust will also be able to guarantee you the right to live in the house and take into account changes in circumstances, like if your child passes away before you do.
One other important benefit of a trust pertains to capital gains taxes. The tax basis of property in a revocable trust is stepped up when you die. This means the basis in the home would be the date of death value of the property. Therefore, if your child sells the property immediately after inheriting it, the value of the property would not see much change. As a result, the capital gains taxes would be little or nothing.
Trusts can be structured to offer more flexibility and protection for all concerned. An estate planning attorney will be able to help you choose the best option for your family and prepare all of the necessary legal documents.
Reference: elderlawanswers.com (February 27, 2017) “Is It Better to Use Joint Ownership or a Trust to Pass Down a Home?