One of the most critical steps in the trust and estate planning process is determining what will happen to your assets after you pass away. In a well-intentioned but often misguided step, many parents mistakenly believe that gifting their house to their children is the best method to avoid probate and inheritance taxes, but gifting your house to your child while you are still alive can lead to devastating problems. As we will discuss, a trust is a far better strategy for achieving this goal.
At Schneider, Garrastegui & Fedele PLLC, we have been helping families for over 30 years with all aspects of estate planning. Read below to learn how to avoid common missteps that can lead to massive tax burdens or the loss of your house. Contact an experienced estate planning attorney to discuss the best strategy for incorporating your house into your estate plan.
Leaving Your House versus Gifting Your House
Though the title of the article says NOT to leave your house to your children, the more appropriate word choice would be not to gift or deed your property to your child.
The difference might sound minor, but it is a significant distinction, and it affects how your estate is owned and taxed. To understand the difference, keep this in mind:
- Leaving your house to your child means they inherit after you die
- Gifting your house to your child means that they receive the property while you are still alive
This difference matters because whoever is the current possessory and legal owner of the estate can be obligated to pay additional taxes, and they can also make decisions about the property that are against your wishes and best interests.
If You Gift Your House to Your Children, It Could Unnecessarily Cost Them Hundreds of Thousands of Dollars in Taxes
Gifting your real estate to a child can lead to unintended consequences, often including hundreds of thousands of dollars in unnecessary taxes that may be altogether unexpected. Your well-meaning efforts could sabotage your children’s financial future. Consider the following examples:
Capital Gains Taxes
If you purchased your house a few years or a few decades ago, it has most likely gone up in value. If you gift a home to a child and they sell it, they will be taxed on the gains or appreciation of the property.
For example, if you bought your home for $200,000 and it’s now worth $500,000, your child may be subject to capital gains of $300,000 if/when they sell the property..
Instead of forcing your children to deal with that tax burden, you can instead set up a trust where you are the grantor and your child is the beneficiary. Under this approach, when your child receives your home upon your death they get a step-up in cost basis, meaning the property they acquired is valued at fair market value and not the original price. This serves to prevent the many years of appreciation.
The Potential to Lose Your Home
If you gift the home to your child or add them to the deed, you may be vulnerable to losing the property while you are still alive. Even the most responsible adult child can run into financial troubles. Your child now owns a portion of the home and if they have children applying to college, run a business, declare bankruptcy or a divorce proceeding these can affect you also.
What Happens If I Leave My House To My Children in My Will?
Parents should be concerned that their children could face a lengthy probate process if they leave their house to their children through their last will and testament. In New York State if you own assets at the time of your death, in your name alone, you are subject to a probate or administration proceeding in Court.
Having an experienced probate attorney can help make the process easier if the house was included in the decedent’s will and you are now anticipating probate, but an experienced estate planning attorney can direct you to a better strategy involving a trust if you are seeking to efficiently shift ownership of your house to your children.
A Trust is a Better Method to Ensure Your Child Gets Your Home
An estate planning lawyer can review the best methods for your financial situation and your goals, and if the concerns addressed above resonate with you, then you should strongly consider using a trust to transfer ownership of your house. An important strength to using a trust is that the capital gains taxes do not come into play when your child becomes the beneficiary at the time of your passing. Different types of trusts include living trusts, irrevocable trusts, grantor trusts, and assorted other variations with specific traits and purposes. Your experienced estate planning attorney can work with you to identify the right trust strategy for you and your family.
While there are some other alternatives, such as a family partnership or an LLC, which might be used to effectively transfer your house or other assets to your children, these require more involvement to set up at the outset, they involve additional ongoing coordination among involved family members, and they are most often used for other purposes. These other arrangements are made with asset protection in mind, so they can help to move wealth seamlessly between generations. However, a trust is a much more straightforward solution for the estate planning goals of most homeowners.
Contact The Law Offices of Schneider, Garrastegui & Fedele PLLC for an Estate Planning Consultation in New York
There are potentially enormous risks to gifting your house to your children, and a trust is most likely the right choice if your goal is to safely move your house to your children’s possession. If you’ve been searching for “trust lawyers near me,” in New York near Melville, then you’ve landed in the right place, and our office can help you to set up a trust that can accomplish your estate planning goals.
At the Law Offices of Schneider, Garrastegui & Fedele PLLC, we assist families with estate planning and legal advice to help ensure that your family is taken care of, and your wishes are respected. To schedule a consultation, call us at (631) 519-9831, or fill out the form on our website.
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SCHNEIDER, GARRASTEGUI & FEDELE PLLC
135 Pinelawn Rd #250s
Melville, NY 11747
(631) 519-9831
https://isvglaw.com