Don’t Gift Your House to Your Child

Don’t Gift Your House to Your Child

Don’t Gift Your House to Your Child

You have one child who really wants your home, and you’ve heard it’s easy and cheap to simply put their name on the deed, so they get it when you die. That way you don’t have to pay any pesky lawyers. Sounds great, right? To find out why this may not actually be right for you, read on!

Instead of gifting your home to your beneficiaries by adding them to your home deed while you’re alive, you should really put your home into your trust instead. There are several reasons why, but the primary one relates to saving the child on taxes:

Tax Savings: When a beneficiary inherits property by way of the original owner’s death, the property typically receives a step-up in basis to its fair market value at the date of the original owner's death. This means that the beneficiary's basis in the property is adjusted to its value at the date of death, which can reduce capital gains taxes, possibly to $0, when the property is later sold.

However, if a beneficiary is added to the deed while the original owner is still alive, the beneficiary's basis in the property generally does not receive a step-up at all when the first owner dies. Instead, the beneficiary's basis typically remains the same as the original owner's basis. As a result, if the property is later sold, the beneficiary would be subject to capital gains taxes on the difference between the sales price and the original owner's basis, rather than the date-of-death value.

Don’t think this matters? Consider those Baby Boomers who bought their house in the 1960s for five figures and are now sitting on an asset that has appreciated 5 or 6 times its original value, or even more. There are monumental capital gains lurking in those holdings. You want to not pay taxes on those.

So what should you do instead? We recommend you put your property into your revocable trust. When you die, you get the step-up in basis described above, and these other benefits below:

Avoiding Probate: When you pass away, assets held in a trust typically avoid the probate process, which can be time-consuming and expensive. This means your heirs can receive their inheritance more quickly and with fewer legal fees.

Control: With a trust, you can specify exactly how and when your assets are distributed to your beneficiaries. This can be particularly useful if you have concerns about your children's ability to manage their inheritance responsibly.

Asset Protection: Assets held in a trust may be protected from creditors and lawsuits in ways that assets held in an individual's name or jointly with others would not be.

Avoiding Co-Ownership Issues: Adding your children to the deed while living makes them co-owners of the property, which can lead to complications if they encounter legal or financial troubles, divorce, or disagreements among siblings as to whether to fix up the property, sell it, obtain financing for it, etc..

Flexibility: Trusts can be structured to accommodate various scenarios, such as providing for a surviving spouse, supporting minor children or beneficiaries with special needs, and ensuring assets are used for specific purposes (e.g., education, healthcare).