We are often asked, “shouldn’t I just sign my house over to my son/daughter/kids?” The answer is almost always No. Why? There are many reasons:
- If they own your house, they can sell your house. While it may seem unimaginable that anyone would put their own parent(s) out of their home, we cannot control events that may occur in the future. We simply don’t know what circumstances may arise. If such circumstances arise, and you are told that the house is for sale, you have no recourse because you transferred the property to another owner, and they have sole authority to sell that property. Retaining a “life estate” in the home at the time of transfer may help, but is an irrevocable decision (see discussion below).
- If they get divorced, your house is at risk. The one thing you can always count on is that things change. That is true for all of us. No matter how strong our marriage may be (or appear to be), only the 2 people in the marriage really know. Your home, having been signed over to your child, will become a “marital asset” if that child later divorces. This means that there is a possibility that you could lose your home.
- If they get sued or go bankrupt, your house is at risk. Your child may have financial issues of their own, and placing your home in their name adds it to their net worth. If the child files for bankruptcy, your home will be a part of that bankruptcy, and could be ordered sold or otherwise disposed as part of that process. Likewise, if your child is sued, and a judgment entered against them, your home will become a collectible asset to satisfy that judgment.
- If they are irresponsible, your house is at risk. Signing your house over to someone else means that the house is now their asset. If they apply for credit (i.e. mortgage, credit cards, personal loans, etc.) your house is an asset that increases their net worth, and thus, their ability to borrow and obtain credit. If they later default on their credit due to the inflated value of their assets (caused by your home), your house is at risk in that default.
- TAXES! You thought you were being generous when you signed the house over to the kids as a “gift”, but you may have caused them an unintended tax burden. Specifically, the capital gain tax that will apply when the house is ultimately sold. Consider this: You purchased your home for $45,000 some years ago (your “tax basis” is $45,000). The home is now valued at $100,000. If the house is sold, there will be capital gain of $55,000 – you enjoy a nice exemption from paying tax on this gain, so this is not typically an issue for the homeowner/resident. However, if you signed the house over to your child, and they later sell the home, they will have to pay capital gain tax on the $55,000 difference between the tax basis and the sale price. Contrast that with this: Same facts, but you don’t sign it over to them during your life. Rather, you child inherits your home at your death. Now, when the child sells the house for $100,000, they owe no capital gains tax because they received a “basis step-up” at your death. Their tax basis is the value of the home on the date of your death, rather than the amount you paid for the home. This can be significant, as the capital gain tax rate can be as high as 20% under the new tax law effective January 1, 2018.
There are other planning methods available to protect your home (and other assets) without necessity of giving everything away and hoping your children don’t blow it.
Seek advice from a qualified elder law attorney before transferring any assets so that you can discover the options available to you and make a fully informed decision.