If you are a parent with adult children, the thought may have crossed your mind a time or two to figure out a way to transfer ownership of your family home to your adult child. Not only are you getting older, but you are not physically capable of caring for the home any longer. The home, in short, is no longer a blessing but has become a significant burden for you. Why not transfer the home and ownership of it to your child while you are still alive? After all, he has assured you that you will be able to remain in the home if you are alive. Where is the downside to doing this?
Whether you plan on transferring title to your home, ownership of your bank account, or another type of ownership transfer to your adult child that may be something that you should tap the brakes on. In today's blog post from the Law Office of Bryan Fagan, we are going to discuss why transferring ownership of your home to an adult child is a mistake. This has seemingly become a more and more popular option for people to choose from as far as estate planning methods are concerned. As a result, we wanted to nip this mistake in the bud as quickly as we could.
However, even if this is not a subject that is important to you we still invite you to stick around and read today's blog post from the Law Office of Bryan Fagan. The fact is that many families who are going through other circumstances involving the world of estate planning could stand to benefit from learning this material. Sometimes the solution to your problem or at least a jumping-off point for asking good questions can be gained from learning other areas of an issue related to your life. By reading this material your brain may jump to some information or a point that you had not connected before. From there you may want to speak with an experienced estate planning attorney about those questions or about how to proceed to begin planning out your estate.
The attorneys at the Law Office of Bryan Fagan are here to assist you in whatever estate planning step you are on. Whether you are just starting by learning more about the world of estate planning or are trying to nail down the details of a will or trust, our attorneys are just what you need to take your case to another level. We pride ourselves on serving the community we live in by providing top-notch legal services. If you would like to learn more about our attorneys and the services which we provide to clients, please do not hesitate to contact us today. A free-of-charge consultation with one of our experienced family law attorneys is just a phone call or message away.
What you are doing by adding your child's name to the deed of your house is effectively making him a joint tenant with a right of survivorship. A joint tenant means that for as long as you are alive your adult son would be an owner of the home and would become the sole owner of the home once you pass away. One of the main reasons why people do things like this is to avoid the probate process. Your estate can be saved time and money by not having to go through probate to pass property to loved ones. Dying without a will is a reason why your estate would need to go through probate, for example. However, by putting your adult son’s name on the deed in this way you would theoretically avoid probate by passing ownership of the home to your son while you are alive.
Here is where putting your son's name on the deed to your home can present some challenges for you and your family. What you see as a goodwill gesture and a big help to you in the short term can be perceived as a gift to your son. There are limits to how much money you can gift to a person each year or the value of the gifts you can give to a person, however. A house, if determined to be a gift by the IRS, would fly right by the amount of money that you can gift to a person each year and not be taxed on it.
As long as the half interest in the home you intend to pass along to your son is worth more than the gift tax limit for any given year (which it likely is) then you are susceptible to the IRS making your life more difficult by seeing this transfer as a gift. The last thing that you want to do is put yourself in a position where you have to try and justify your transfer of ownership as something other than a gift to the government. This is a great gesture on your part for your child and is a way to pass down wealth and help an adult child during a time when home ownership can seem more like a far-off dream than a realistic aspiration for many adults.
Your good intentions will not necessarily save the day, however. What you need to be able to focus on is how to accomplish your good intentions in a way that is beneficial for your child and for you. A gift is a gesture with some kind of benefit for another person and no tangible or intangible benefit for yourself. In a situation where you are unable to care for a home yourself or have some other legitimate reason for wanting to transfer property in this way, it would not be proper to say that the transfer was done as a gift. Mutual benefits do not meet the definition of a gift.
Capital Gains- More tax issues where you didn’t need them
Taxes are right at the root of the issues related to capital gains associated with transferring ownership of your home to an adult child while you are still alive. This has to do with your child’s basis in the property once he becomes an owner. Imagine a situation where you bought your home in 1987 for $75,000. It is now worth somewhere around $300,000 in 2023. If you were to place your child’s name on the deed to this home while you were still alive then you are putting your adult child in a position where his basis in the home would be equal to your own. Why does this matter, ultimately?
This matters a great deal as the IRS will be calculating taxes for capital gains with your child having the same basis in the property as you had. The capital gain on the home when your child sells the home could be substantial as he would only be able to subtract from the sale price of the home the $75,000 that you purchased the home for back in 1987. On the other hand, if you were to pass the home to your child in a will or trust you would put your child in a position where their basis was the value of the home when he acquired it via the will. The sales price of the home when he chooses to sell it minus the stepped-up basis at the time of acquisition greatly reduces the likelihood that estate taxes will be a factor for your child to consider and plan for.
Creditors coming in against your adult child
One of the most concerning features of making a pre-death transfer of ownership of your home to your adult child relates to an issue that is completely out of your control. Once you transfer ownership interest in your home to your adult child the home is just as much his as it is yours. Depending upon how you manage the deal it may be that your child is the only person who is an owner of the home. Emotionally it still may feel like you are the owner but, your child owns the home. This can present challenges for you and your child depending upon how life turns out for him based on his decisions and his legal history.
Financial problems are a growing concern among many Americans. Every day we hear seemingly contradictory information about the economy and whether it is strong or weak. We hear about inflation slowing down and job growth being consistently better than expected but feel like our money isn’t going as far as it used to. The current state of the economy is what we believe it to be, ultimately. If someone has recently lost their job to layoffs, then their perception is likely that the economy is doing poorly. On the other hand, if you have maintained employment and inflation has eased up on your pocketbook then your perception is likely that the economy is strong.
In any event, your adult child is subject to the whims of the economy just like the rest of us. Why is this important when it comes to a house that your child hypothetically doesn't even own yet? The reason why the well-being of your child from a legal and economic standpoint it's important when it comes to titling your family home in his name is because if he is having problems with his finances then there are direct consequences to bear upon the home which you recently titled to him. It may not seem obvious to you initially but if your son is struggling to pay his bills or owes creditors money then those creditors can look to his newly acquired home as property which can potentially be seized if a debt cannot be paid back.
Once your son's name is on the title to the home then as the owner of the home his creditors can come after the house if he stops paying his bills. A lien can be placed on the home to protect against your son's defaulting on a debt. This means that in a potential lawsuit situation, a bank or other creditor could become the owner of your home. It would not matter if you had an agreement with your son that you could remain in the family home for an extended period. The bank or creditor could prevent your son from selling the home, transferring ownership back to you, or doing much of anything else.
What if your child gets a divorce?
This is a particularly messy situation, where your child goes through marital difficulties and ultimately has a divorce filed against him by his wife. Not only will your son be hurting from an emotional perspective, but he may also be in the position to suffer a great deal as a result of how the property division aspects of his case shake out. Remember that Texas is a community property state. Under most circumstances, when a home is acquired during the marriage at home is community property. Thus, it will be subject to division in the divorce. There are inheritance and gift exceptions to this general rule but those can be more difficult to prove in court than you may think.
There are a couple of different outcomes which could result from this situation involving your child and their ownership interest in your home. The first would be that your child can retain ownership of the home but must buy his wife out of her interest in the home. This means that he may have to sell some separate property, take out a loan or perform some other action that he would likely prefer not to have to do. But for his ownership interest in the house and how you structured that deal he would not have had to do things this way. It is also possible that he may be able to force a sale of the home rather than have to pay his ex-wife out of the home. It is also possible that His ex-wife could manage to become the owner of the home if your son has no way of paying his ex-wife her interest in the home or has no willingness to take out a loan to do so.
What can happen if your son gets into an accident?
One of the scariest events that could happen in the life of any of us is getting into a significant motor vehicle accident. Picture this, you have just transferred ownership interest in the home to your child when your son gets into a significant car accident the following week. You are still living in that home when the accident takes place. Normally, when an accident like this happens the driver at fault has car insurance, and that insurance would help to pay for vehicle repairs or a replacement as well as the costs of medical care, if any. This is why it is a law that drivers carry car insurance.
However, it is possible that your son either does not carry any car insurance or has so little car insurance that the other driver has no choice but to file a lawsuit against your son directly to be made whole from the car wreck. This could certainly be a possible outcome if you're son has only liability insurance coverage and if the other driver involved in the accident does not have underinsured motorist coverage. If the other driver can win in a lawsuit against your son personally then a lien could be placed on the home. That lien may be able to eat away at some or even most of the equity in the home. While a lien can be placed on the home a creditor could not seize the property.
What used to be yours no longer is
When you add your child's name to the deed of your home then you lose the control that you used to be able to exert over your property. Your child would have to permit you to be able to sell your home or refinance the mortgage. In the future, if you decide that you no longer want your son's name to be on the deed to your home then you will find yourself in a tricky position where you may have to ask him to sign a quitclaim deed or special warranty deed to allow that to happen.
In writing this blog post our main intent is to show you that what can seem like a good option at first may end up being a poor choice when it comes to titling a home in the name of your adult child. There are other ways to pass on wealth and to ensure that your children can benefit from your years of home ownership and good financial discipline.
Questions about the material contained in today's blog post? Contact the Law Office of Bryan Fagan
if you have any questions about the material contained in today's blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed estate planning attorneys offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas estate planning as well as how are your family’s circumstances may be impacted by the filing of a probate case.