What are the ways to give your house to your children?
There are four common methods parents use, and each one has its pros and cons. Below I will walk through all four so you can choose the best option for your family.
Option 1: Put Your House in a Living Trust
A living trust is a legal document that holds your instructions for who inherits your property when you pass away. In the trust, you can say your house goes to specific people.
This is usually the best option for homeowners, and it has several advantages.
You keep 100 percent control while you are alive. Your children cannot demand that you sign the house over to them. It is in the trust for them when you pass away, but while you are alive it is still yours. You can change your mind, sell it, or refinance it. It stays under your control.
You decide how your children inherit. Maybe you want them to hold the house and rent it out for 5, 10, or 15 years before selling. Maybe you want it kept as a family home, so a child who loses a job or their housing always has a place to live. If you have specific wishes like that, and you do not simply want your kids to sell it the moment you are gone, your trust can spell that out.
You choose the right person to manage the process. This person is called the successor trustee. They handle the transfer of the house from you to your children, which helps avoid arguments, confusion, and even litigation if your children do not agree on how things should go.
Your children avoid probate court. If you pass away with the house still in your own name, your children will likely have to go through probate to receive it. Probate lasts one to two years or more, it is public, and it costs at least a few thousand dollars, sometimes tens of thousands in states like California.
The main disadvantage is cost. A good living trust lawyer who builds a plan for your specific situation runs a few thousand dollars, which is not in everyone’s budget. That is exactly why I created a free trust class, so you can learn to do it yourself from start to finish. Some people also avoid a trust because there is a process involved. But as long as you can follow instructions, setting up a trust is not rocket science.
A quick word on wills. People often ask if they can just use a will to pass on the house. You can, but a will guarantees probate, because your children have to take it to probate court to receive anything. In most situations, a will actually costs more in the long run than a trust when you own a home. If you are a homeowner, I would avoid relying on a will to pass down your house.
Option 2: Sell Your House to Your Children While You Are Alive
If your children have the capital to buy the home from you, this can be worth considering.
The advantages are that your kids do not have to wait until you pass away, you get extra cash you can use, and you can downsize to a smaller property if that is what you want. There are also no gift tax issues, because you are selling the house rather than giving it away. Keep in mind you have to sell it at fair market value for this to work.
The main disadvantage is that you no longer own the house. Once it is theirs, your children could ask you to leave. So depending on your situation, selling to your children right now may not be the best move.
Option 3: Give Your House to Your Children Now
You can also gift the house to your children while you are alive, so they can live in it, sell it, refinance it, or rent it out right away.
The disadvantages here are significant.
You no longer own the house. Just like selling it, once you gift it, your children could push you out. I have heard of it happening.
The house is exposed to your children’s problems. Once your kids are on title, whether you give them 1 percent or 100 percent, the house is subject to their creditors, divorce, and bankruptcy. If a child is sued after a car accident and loses, the plaintiff could go after your house. If a child divorces, their ex-spouse could walk away with a portion of it. If a child files for bankruptcy, you could lose the home.
There are tax downsides. Gifting creates gift tax issues at both the state and federal level. It also means no step-up in basis for your children, so they lose a tax advantage when they eventually sell.
Before giving your house to your children, talk to a CPA or a living trust lawyer. Unless there is a strong reason to do it now, this is usually not the best idea.
Option 4: Use a Transfer on Death Deed
A transfer on death deed is a deed you record with the county now that says your house passes to a specific person, like your children, when you pass away.
The advantage is that it is low cost, simple, and cheaper than setting up a trust, and it helps avoid probate.
But there are real problems.
If you do it wrong, you will not find out until it is too late. By the time the mistake surfaces, you have already passed away and it cannot be fixed. That uncertainty is a big reason we usually do not recommend it.
There is little protection for minor children.
Watch out for Medi-Cal or Medicaid estate recovery. A lot of people do not know this. If you are on Medicaid or Medi-Cal, the government can place a lien on the property and force a sale to recover what they paid for your nursing care if the property goes through probate.
There is no protection if you become incapacitated. If you are disabled and you only recorded a transfer on death deed, your children cannot manage the property for you while you are alive, because they have no legal power to do so. Unless you have a power of attorney or a living trust that owns the property, there is no protection for your incapacity.
Because of all this ambiguity and uncertainty, attorneys usually do not recommend transfer on death deeds. A trust paired with a power of attorney is generally the better choice.
Choose the Right Option for Your Family
Educate yourself before you hire a lawyer or do it yourself. Know your options, and know which one fits your specific situation. For most homeowners who want to keep control while alive, avoid probate, and protect their children, a living trust is the strongest option.
Ready to Protect Your Home from Probate?
If option one is where you are leaning, here is how to get started.
Take the free trust class. I show you how to make your own trust the right way, so you can protect your house from probate with confidence and make sure your kids receive your home when you pass away. Register at freetrustclass.com.
Book a free phone consultation. If you would rather have it handled for you, talk with our team about a plan built around your family. Call us at (408) 412-1913 or visit treeoflife.legal.
Subscribe on YouTube. I post new videos every week on estate planning and how to do it yourself.
My goal is to help you keep more money in the family and give you the peace of mind you deserve.
Disclaimer: I am not your lawyer, and this article is not legal advice. It is information only. Reading it does not create an attorney-client relationship. If you have a legal question, please talk to a lawyer.
