True or False? It’s a Good Idea to Put Your Kids on Your House to Avoid Probate?
Many people think if they put their kids on their home, it’ll help them avoid probate. What they don’t know is that it’s not a good idea for many other reasons.
Estate Planning Attorney Bill Henry shares why it may not be a good idea after all to put your kids on your house.
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True or false, it’s a good idea to put your kids on your house to avoid probate? My name’s Bill Henry. I’m an estate planning and elder law attorney with Robinson and Henry. I see this all the time, and clients are asking me this question all the time, and the answer always is the same, no, don’t do it, terrible, terrible idea. Here’s why.
Here’s Why You Shouldn’t
The first thing is, let’s say I put my daughter on my house, and she goes out and gets into a car accident, and then, whoever she hits sues her, and now, all of a sudden, she owes the person $1 million, and she doesn’t have $1 million of insurance.
Well, guess what? They’re gonna start looking for other assets, and I gave her a portion of my house, so when you put somebody on title to your house, you literally just gave them a portion of your house. Now, they can sell my house from under me, and use her share to pay off part of her debt, so not a good idea right there, so there’s the first reason.
Second reason is, let’s say, instead, she doesn’t get into a car accident, but she decides, you know what? I really wanna move out to L.A., and become a movie star, and I really need some cash. What am I gonna do? Well, she goes to an attorney. That attorney can tell her that, guess what? You’ve got the right to sell that house.
It’s called a partition action. It’s an action where we go to court, and we say, hey, court, we wanna sell this house, and in Colorado, it doesn’t matter that the other person that owns the house doesn’t wanna sell. The court will force the sale of the house, and now, all of a sudden, I’m living on the streets, and she gets 50% of the house to go out to California. Once again, terrible result. We don’t want that.
Well, final thing is, well, what if she is an angel, and she wouldn’t sell my house, and she wouldn’t get into a car accident. What about then, Bill? Is that a good idea? Well, still, the answer is no, and the reason is because from her perspective, the tax consequence is way, way worse. Let me give you an example.
So, let’s say I buy a house for $100,000, and then, I put my daughter on that house, and then, the house appreciates, and now, it’s worth $500,000. Well, guess what? When we sell that house, we have $400,000 to gain, right? That’s 500,000 minus 100,000, so it’s $400,000. The tax on that’s gonna be about 15% for most people, or $60,000, so therefore, my daughter is gonna pay about $30,000 in tax, right, 50% of her share of that house.
Well, could we avoid it, and the answer is yes, we can, so, let’s say instead, I don’t put her on the house, and instead, I give it to her upon my death. She doesn’t get what’s called a carryover basis so it’s not like she bought the house for $100,000. It’s the value of the house the day that I died, so let’s say the day that I died, it’s worth $500,000.
Well, it’s as if she bought the house for $500,000, so if she sells it, what’s her tax? Nothing, 500,000 minus 500,000 is zero, so she would save $30,000 in that example. So, we definitely don’t wanna put our kids on the house. So, just to wrap this whole thing up, is there any way that we can avoid probate, right, because that’s why everybody’s putting kids on their house. They think it’s a great idea. I’ll avoid probate, and put my kids on the house.
How Can You Avoid Probate?
There are ways that we can avoid probate, and not put our kids on our house. The way we do it, I’ll give you two ways. One is what’s called a beneficiaries deed. That’s a deed that just says, upon my death, if I still own this house, and I haven’t revoked this deed, it just goes to whoever the beneficiary is, my daughter, for example, automatically, and I avoid probate, so great result.
The other way to go is with a trust. You just put your house into the trust, and you make your kid the beneficiary of the trust. Both those ways do everything that people are trying to accomplish. We avoid probate, and at the same time, we don’t make our kids’ problems our problems, which is never a good idea.
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