How to Leave Your Home to Your Kids

If you are like most people, your home is the largest and most valuable asset in your estate. It is likely that you have spent years building equity in your home, making lifelong memories, cutting the grass, and working against a mortgage or two. With all of the time and money you have spent on your home, it is essential that you take the time to ensure that your hard-won asset passes down to the next generation.  

There are a number of ways to leave your home to your kids or loved ones, and each of them comes with a bundle of tax and estate planning implications. Transferring your home in a way that preserves family harmony and avoids unnecessary cost and conflict should be central to your estate plan. An experienced estate planning attorney can help you weigh your options and determine the right method for you and your family.

Can’t I Just Give the Home as a Gift?

Of course, you may give your home to one or more of your children as a gift during your lifetime. If you do so, you will want to go over this plan with an attorney and an accountant. Giving a gift as large as a home may trigger one or more significant taxes both at the state and federal level. You will want to be sure to understand the full tax implications of such a gift.  

These days, people are living longer, healthier lives, and many older people find that they are able to live independently for much longer than they may have expected. For a lot of people, this changes the calculation about transferring a home before they are ready to move out and tips the scales in favor of transferring the property to heirs after death.

What if I Put my Child on My Home with Me?

Very often, clients ask me whether it’s possible to add a child to the deed as a co-owner, as a way of transferring the property outside of probate. The short answer is: yes, and it is incredibly simple to do so. All that the homeowner needs to do is use a quitclaim deed, which can be found online. However, there again are significant tax and liability implications that must be considered before doing so.

First, adding a child to the deed has all of the same tax ramifications as if you gave a gift of the property outright. Because joint tenants co-own the entirety of the property together, the value of the gift will be the full value of the home, which can be costly in gift tax and capital gains. For children who receive public benefits, such a large gift can also have impacts on their eligibility. Another common challenge that arises with children as co-owners of a home is control. If the parent needs or wants to sell the home or refinance it, he or she could only do so with the permission of the co-owner. Finally, for any liabilities that arise out of home ownership, co-owners will both bear responsibility. This can be incredibly challenging if the child has financial and/or marital troubles.

Should I Include My House in My Will?

When most people think about estate planning, they think of a will. It’s true that a will is the simplest, and probably least expensive, estate planning tool to create. This is because it is basically a document that lists your preferences for how you want your affairs to be handled after you pass, and then a court will go through the document and determine whether the preferences are legal and fair.  

This court process is called probate. After your death, your will begins the probate process by the court determining the legitimacy of the will and making the contents of the will publicly known. This gives creditors and others the chance to come forward and declare any outstanding debts you may have at the time of death and any contentions over the contents of the will. If you have any significant debts, this may affect the amount of your estate that you are actually able to pass down to your children. A court can force a sale of real estate if there are not enough assets in the estate to pay creditors.

The probate process, aside from being public, can also be expensive and time-consuming. It is estimated that probate costs (between attorney’s charges and court fees) end up being between 3 and 5% of the total value of the estate. This is a cost that will ultimately come out of your children’s inheritance.  

Finally, after debts and challenges are managed in court, the home may pass to your named heirs. However, if you leave a home to more than one person, they each will take full ownership rights of the property. This means that, whether they decide to keep or to sell the home, they will have to agree on the outcome. If your children are of different opinions on how to manage the home, this can lead to family conflict and even further court proceedings.  

Transfer-on-Death Deeds in Colorado (Beneficiary Deeds)

If you decide that you want to transfer ownership of your home to a specific individual, such as a child, you can do so using a “transfer-on-death,” or “beneficiary” deed. In the State of Colorado, it is possible to record such a deed in the land records that would pass title of your home to the designated individual immediately upon your death, without the need for probate. In many ways, a transfer-on-death deed behaves the same way as a beneficiary designation on a bank account or life insurance policy. The deed can be revoked or changed at any time during the grantor’s life, but, upon his or her death, it goes into effect, regardless of any contradicting information provided in a trust or a will.

Transfer-on-death deeds should not be used to replace a comprehensive estate plan, and they are generally best used for relatively small estates. Again, there are potential tax and public benefit implications of such a transfer, so it is always important to consult with an attorney on your specific situation.  

What Does it Mean to Transfer the Property to a Trust?

To avoid probate and retain control over the property, it is possible to transfer ownership of your family home to a trust. There are many different ways to structure a trust, each creating different results. While trusts cost more than a will to create, there is no cost to your heirs later on. Based on the instructions on the trust, the transfer of property also occurs much more quickly than if the estate has to first go through probate. 

Revocable and Irrevocable Trusts 

There are two major kinds of trusts: revocable and irrevocable. Revocable trusts are those that can still be changed by the grantor after they are created. Irrevocable trusts become permanent once they are created.

You may have heard of a revocable living trust. This form of trust is becoming increasingly popular and can be created while you are still alive. You, as the grantor, can name yourself the primary trustee, and this allows you to retain control of the property until you pass. Once you die, the revocable living trust becomes irrevocable, and it can no longer be changed. The successor trustee, whomever you name in the trust document, will take over control of the property in the interest of the beneficiaries, your children. This kind of trust allows the property to be transferred to your children without going through probate and without undue delay.  

Because there is a trustee in charge of serving the beneficiaries’ interests, this third party could mediate any potential conflict between heirs. This kind of trust would also allow you to control any concerns you may have about your heirs. For example, if your children are young adults or are not ready to take on the responsibility of home ownership, the trustee can help the beneficiary by managing the home in his or her interest. 

Because a revocable living trust can be changed up until the time the grantor passes, the assets in this trust are not shielded from creditors, and they are considered a part of the estate. In the case of a revocable living trust, the home may still be vulnerable to outstanding debts.  

If you own a home with a spouse and have children from a previous marriage, this may also be a good place for a trust. Many people want to ensure that their spouse is cared for over the rest of his or her life, but they want the remainder of their estate to pass to their own children, rather than their spouse’s heirs. In this case, a Qualified Terminable Interest Property (QTIP) Trust allows a grantor to provide for a surviving spouse and then preserve the remainder of the property to be distributed to their own heirs. A QTIP trust is irrevocable and therefore is shielded from creditors.

Can I Leave My Home to Minor Children? 

If you want to leave your home to your minor children, you are going to have to either use a trust or name a custodian. A property custodian keeps control of the property until the children are old enough to take ownership themselves and makes regular reports to the court. If you place the property into a trust, the named trustee would manage the property until the children are old enough to do it themselves, in accordance with the trust instructions.

Talk to an Experienced Colorado Estate Planning Attorney

Every family’s circumstances are different, and transferring real estate is only one part of a comprehensive estate plan. It may seem confusing, but we are always happy to help. If you own a home, and you have not made plans for how to transfer ownership to your children or other loved ones, feel free to reach out to Chris Gordon at Stewart + Gordon in Denver. Our phone number is (303) 337-2400.