Q: My parents want to transfer their home to the children before they die. How would they do that and what are the pros and cons?
A: To transfer real estate to the children, your parents would utilize a deed. The deed could be a quitclaim or a warranty deed depending on if they want to warrant title. However, it has been my experience that a quitclaim deed is usually enough.
Now having said that, the real question is should your parents convey title during their lifetime. The answer to that isn’t as simple. There may be some good reasons to make the transfer, but there may also be some really good reasons not to.
If your parents want to transfer title during their lifetime for some gifting or estate planning purposes, then it may be a good idea. Also, if they intend to divest themselves of ownership for some other reason, i.e., Medicaid planning, it might also be a good idea. However, unless there is a really good reason to transfer title, I probably wouldn’t recommend it.
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Here are some of the cons to transferring title during their lifetime. First, and foremost, they won’t own the property anymore. That means the new owners, the children, could do what they want with it including, but not limited to, mortgaging and selling it. They could even evict the parents from the home if they still intend to reside there. Yikes.
Also remember, once the children have an interest in the property, it could be subject to things like judgment liens in the event one of the children ends up on the business end of a law suit. That means if one of them has a judgment entered against them, the judgment creditor could attach and foreclose their judgment lien and force the sale of the home.
Also, since the transfer would be a gift, the children will take the parent’s tax basis. Think of it this way: if the parents bought the house for $50,000 but now it’s worth $100,000, the kids could be facing a $50,000 capital gain when they sell it. There is no step up in basis on a gift.
Admittedly, there are a few reasons that a person might want to transfer title during their lifetime but there are also a bunch of reasons that they might not want too.
What I suggest they do is sit down and talk with an attorney to come up with a game plan. There may be better ways to accomplish their goals that don’t involve giving up ownership.
Whatever their end game is, talk to an attorney before deciding. For a lot of folks, the home is the most valuable asset they own and they should make sure that they consider all of their options before transferring it.
Christopher W. Yugo is an attorney in Crown Point. Chris’ Estate Planning Article appears online every Sunday at www.nwi.com. Address questions to Chris in care of The Times, 601 W. 45th Ave., Munster, IN 46321 or to Chrisyugolaw@gmail.com. Chris’ information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant, or estate-planning specialist.