Do not add Your Children to Your Home!
Our office often receives many questions from clients wishing to add their children’s names to their homes. People generally want to add their names to their parents’ homes to either avoid probate or protect the home from the nursing home. This handout will discuss why this is a bad idea.
Q: Should I add my children's name(s) to my house?A: Generally speaking, this should not be done under most circumstances. There are a number of reasons for not adding your children's name(s) to your home:
Reason #1: Upon your death, almost all of your assets receive a step-up in basis. "Basis" is a tax term describing the amount of income received when an asset is sold. Any appreciation above your basis (the purchase price) will result in taxable income.
Upon your death, your assets are not valued at their original basis, but will receive a new basis based upon the asset's date of death value. This is generally referred to as a "step-up" in basis, which allows heirs to sell property without paying taxes on the gain during the decedent's life. Thus, your heirs inherit the property with the value as of the date of your death, thus avoiding the property value gain.
Gifted property, on the other hand, such as adding children to your home, does not receive the step-up in basis upon death. The interest in the gifted property has the donor's original basis. An illustration based on the above differences in basis is demonstrated as follows:
Example 1: Mother purchases house in 1970 for $30,000. The home has appreciated to its present value of $130,000. Shortly before her death, mother deeds the house to her daughter in order to avoid probate. When daughter sells the house, (under most circumstances) she will have a gain of $100,000 on the property. This will be taxed at rates up to 39%, based upon daughter's income tax rate. The transfer thus costs the family a great deal of income taxes that would otherwise not be paid.
Example 2: Same facts as above, but mother dies with house in her name, which is then probated. Daughter now sells the property for $130,000. Child pays no income taxes from the proceeds of the sale as her basis in the property is based on the value at the decedent's death.
Thus, as illustrated above, transferring your home to a child before death to avoid the costs of probate can end up costing much more in income taxes.
Reason #2: There are better ways to avoid probate.The avoidance of probate is generally a good idea as it will likely save your heirs time and money. We generally recommend placing your home into a revocable living trust. Our offices will be glad to discuss these options with you.
Reason #3: In the event of conflict with your children, you cannot sell or mortgage the house withouThis can potentially create many scenarios for conflict, which we have seen here in our offices. Why would you want to take this chance?
Reason #4: Florida does not take your home in the event you need MedicaidIf your home is worth less than $552,000 (2017), your home is not a countable asset for Medicaid purposes. Thus, homeownership is usually not a problem for long-term care purposes.
Thank you for taking your time to review this. If you have any particular questions, we will, of course, be glad to sit down and give you proper advice regarding your estate planning and asset protection options.