Some parents ask about the wisdom of deeding their home to their children as a means of avoiding probate. That approach has some serious risks.
Creditor Claims: If any person whose name is on the title has unpaid creditors, those creditors may be able to force the sale of the home to satisfy the unpaid debt. So, deeding a home to a child who either has, or may end up with creditor problems (anything from unpaid credit card debt to liability for an auto accident, for example), could cause the parents to lose their home while they are still living.
Transfer Complications: Also bear in mind that, once an interest in the home is transferred to the child, it may be a one-way trip. The child then has to agree in writing to any sale, transfer, or refinancing of the property. If there is a falling-out between the parents and the child, that may prove to be a problem. Or worse yet, the child could sell the house out from under the parents while the parents are still alive in the event of a serious dispute.
Loss of Homeowner’s Exemption: In Idaho, a home in which the owner resides receives a substantial break on property taxes under the Homeowners Exemption. But if the title to the home is deeded to a child to avoid probate, the home is no longer owned by the occupant. It is owned by the child who lives elsewhere. So, the property taxes can easily jump by more than $1,000 per year.
Loss of Stepped-Up Basis: Transferring a home to a child while the parent is still living may also result in substantial long-term capital gains taxes being due when the child sells the house. On the other hand, when a child inherits the house under a Will or Trust that the parents have set up, the accumulated long-term gain for tax purposes is wiped away at the death of the parent. The children receive the benefit of what is called a “stepped-up basis” upon the inheritance of the home. They can then sell the home after the parents pass away with much lower taxes being due in connection with the sale.
So, one should exercise great caution in considering deeding a home to a child as a means of avoiding probate. For most people, it’s a path that is fraught with danger.