How to Benefit from an Estate Plan When You Own Real Estate
Many parents believe that by adding a child’s name to a property deed, they can pass along the property outside of probate. Unfortunately, those who act on that belief often find they have invited more problems than they have avoided.
This is because in many states, when more than one person owns property together and they are not married. The property that is owned is referred to as tenants in common. This means that if one of the owners dies, his or her ownership share does not transfer to the other owner. It goes to the deceased owner’s heirs through probate.
This problem can be avoided if the deed lists the property as designate property ownership with joint tenants that both have the right of survivorship or similar language signifying survivorship rights. Enlisting the help of an attorney with estate planning knowledge would be advisable to pass your property on outside probate.
However, there are some reasons why it may not be advisable for you to deed real estate to children, with adverse tax consequences topping the list. This is because deeding property to children is actually considered a gift, and the cost basis for that gift is what you paid for your home.
Example: say you paid $50,000 for your home and it is now worth $350,000. You add your children to the deed, which the IRS deems a gift. After you die, the children sell the home for the market value of $350,000. They will be taxed on the difference between the cost basis of $50,000 and the sale price of $350,000 – or $300,000, minus the cost of the sale. That’s a big tax burden for your children.
Another solution would be, if your children inherited the property via your will, then sell it using the same scenario above, they would owe no tax on the sale because their cost basis is what the property was worth when they inherited it (current market value of $350,000).
If the idea is to leave property to children while avoiding probate, you can do so by creating a simple trust and titling the property in the name of the trust, naming your children as trust beneficiaries. You avoid the problems and costs that the property passes outside probate in a tax-advantaged way.