Cons Outweigh the Pros in Deeding Your Home to Your Kids Before You Die

Parents who share ownership of the parental home with their children (“jointly held”) – or gift the home entirely to their children — during the parents’ lifetime invite trouble rather than accomplish effective estate planning.

One Minnesota couple gifted the family home to their four children, and didn’t tell their children – perhaps as a way of keeping day-to-day control over their home while preserving the homestead asset for their children in case the parents eventually needed Medical Assistance, Minnesota’s name for its Medicaid program. When Medical Assistance is used, the surviving spouse can live in the home until the surviving spouse also dies, but then Minnesota wants to be repaid for its aid out of the house sale proceeds. Due to the transfer in our example, the parents no longer owned the house. Consequently, as long as at least five years passed between the gift date and any parental use of Medical Assistance, the house would be untouchable as repayment for Medical Assistance.

Nonetheless, the transfer of the family home to the children created a cascade of problems for this Minnesota family – some exacerbated by not informing their kids of what the parents had done. However, most of the problems would have occurred even if the children had been aware of their parents’ action.

Here are some reasons why children should almost never be named as joint owners with their parents, or be given full ownership of the family home, while a parent remains alive:

1. Increased taxes. When children inherit property from a parent, they inherit it at the fair market value of the property on the date of the parent’s death. Thus, if the property is sold shortly after the parent dies, typically no capital gains taxes are owed. However, by gifting property to their children, the property is “owned” by the children, for tax purposes, at the price that their parents paid for it. If the parents owned the property for several years, the difference between what the parents paid for the home and the home’s fair market value when eventually sold could be substantial, creating significant capital gains taxes.
2.   “Too many cooks in the kitchen”. If a decision is made to sell the home now owned by multiple family members, all of the family member owners – and their spouses – will need to agree to do so and be willing to sign the deed.
3. Divorce. If one of the children owners is involved in a divorce proceeding, the home will be considered a marital asset. The divorcing child’s interest in the home will need to be addressed in the divorce decree. Otherwise, title to the property will be clouded, which will likely render the property unmarketable when the family later decides to sell it. If, as in our example, the home was not addressed in the divorce decree because the divorcing child wasn’t aware of the parental transfer to him or her, the divorce will then need to be reopened so that an amended decree may be filed.
4.  Bankruptcy. If one of the children files bankruptcy, the home will be considered an asset available to creditors, and could be subject to seizure or sale. As with the divorce situation, title insurers will expect to see the status of the house addressed in the bankruptcy papers, or the title to the house will be clouded and unmarketable.
5. Judgments. If a child has a judgment entered against him or her due, for example, to a car accident or sour business dealing, the family home will be an available asset for satisfying the judgment.
6. Gift taxes. If a parent deeds all or part of the family home to their children, the parent has created a gift. The first $14,000 in value per child per parent is protected via the annual exclusion amount from gift taxes, but larger values may trigger the need to file Minnesota and federal gift tax returns.
7. Grandchildren could be disinherited. If a parent deeds the family home to his or her children as joint tenants, and one child dies, the deceased child’s children (the grandchildren) will no longer have any financial interest in the home. Instead, the deceased child’s siblings will inherit. It won’t matter what the Will says.
8.  Property Insurance May be Impacted. It is easy to forget to list the new owners on the home insurance policy, which may negatively impact the validity of the insurance coverage. Liability exposure may also increase if, for example, the house is now owned by mom’s and dad’s four children. A would-be plaintiff would now have the financial assets of four families to pursue rather than just the assets of one family.

Moreover, if a parent lists only one of his or her children on the house title, a bank account, etc., as a matter of convenience, that child will own the entire asset upon the parent’s death. Again, it won’t matter what the parent’s Will says because jointly titled property isn’t impacted by Will language.

And, should that child decide to share the asset anyway with his or her siblings, then that child will have made a gift to the siblings, which may trigger gift tax consequences.

Net, net, in nearly all cases, parents should not transfer their home to their children except at death. Consult with an estate planning attorney before making moves that may do nothing but provide heartache, headaches, and cost lots of money.

©2013 Wittenburg Law Office, PLLC. All rights reserved.

Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305,   952-649-9771  www.bwittenburglaw.com  bonnie@bwittenburglaw.com