What Are the Costs and Taxes to Transfer a House to My Child?

There are many ways to transfer a house to your child tax-free. If you are not careful, your child could have to go through probate court and the attorney fees associated with that. Let’s take a look at the pros and cons of the ways you can transfer a house to your child.

Life Estate Property Deed

With a life estate property deed, you can use your property during your life and it transfers after you die, but you no longer own the property. Your heir owns it and there are many problems associated with this type of arrangement.

• Capital Gains Taxes: If you sell the home, you could pay capital gains taxes on the amount your house has increased in value over the years. According to Federal Tax Laws you lose your “Principal Residence Exclusion” if you do not live in your house for 2 of the last 5 years.
• Loss of Equity: If you arrange a life estate with your child and they owe taxes, go into bankruptcy, or get a divorce, a lienholder could own your home.

Transfer On Death Deed

In TX, it became legal in 2015 to use a Transfer on Death (TOD) deed which immediately upon death, gives the property to whomever you designate. These titles are straightforward and easy to file with the help of your attorney when planning your estate. They can also be part of a will. 

In a Transfer On Death deeds, the property simply moves hands immediately upon your death without having to go through probate. Probate can last months or years depending on how you have set up your estate plan so a TOD is a good way to avoid probate costs for your children. The avoidance of probate allows for you to avoid incurring court costs and administrative costs to deed the property to your child. 

If you received Medicaid benefits before passing away, Medicaid will attempt to recover their expenses by seizing assets. A TOD prevents your property from the Medicaid estate recovery process. 

Depending on where you live, there will be court fees charged for filing and serving court papers, fees to pay a court reporter to transcribe depositions, photocopy court papers, etc.

Revocable Trust

A Revocable Trust is a type of legal agreement that you keep assets in. It is controlled by the Trustee who manages the assets in the trust. The Trustee can be yourself or someone you trust. You can place your home and other assets into the trust to be managed. 

In a Revocable Trust, you name your beneficiaries to inherit and taxes are paid by the trust while you’re alive and by the children once you pass. Trusts can be a bit more expensive to set up than simple transfers of ownership but they do give you more control over your assets and how to distribute them between heirs. 

There are costs involved in setting up a trust as you work with a lawyer, but it might be cost effective to use a trust to avoid taxes.

Gift Deed

A gift deed transfers ownership of your property but must be reported by you on your income taxes. If you sign the home over while still living there and are unaware of the tax implications, you and your children might end up owing taxes. 

A major problem with this arrangement is that If your child ends up in legal troubles and owes money to an ex-spouse, a creditor, or a claimant in a court battle, you could lose your house. 

Lady Bird Deed

With this arrangement, your home transfers to your children after you move into a nursing home. A caregiver child can get ownership after you move. A Ladybird Deed allows you to pass your home on to your children while still obtaining Medicaid coverage when you need it.

According to Texas Law Help, “Lady Bird Deeds are often used in long-term care planning. It gives you the right to live in, sell, or mortgage the property while you’re alive and gives the beneficiaries on the deed the right to receive the property (if you still own it) when you die. The transfer is contingent on whether you still own the property.”

Your Will is Key 

The will remains an important part of your estate plan no matter how you choose to give your house to your child. Your will provides how property without beneficiary designations passes, and may provide what happens if all beneficiaries predecease you.

Your will allows you to provide in detail who gets items of personal property, including your motor vehicles, heirlooms, and furniture. Without a will, the state will put your children through probate court and anyone can make a claim on your property. Without a will, the settling of your estate will also be part of public record.

Seek Counsel 

The opinion and advice of a trustworthy and knowledgeable attorney will give you peace of mind as you work through the ways you could give a house to your child. Working with an attorney who knows all of the recent tax and real estate laws will give you every advantage. Planning can be complicated on your own, but with the right help, you can have peace of mind knowing that your children will be provided for in the manner you wish.