If your plan is to leave your house to your kids
by just putting them on title, please stop.
That one move can trigger gift tax reporting.
Destroy one of the biggest tax breaks your family could have ever had, and
create exactly the kind of family fight you were wishing and trying to avoid.
And the crazy part is, people do this thinking they're making their life easier.
So in this video,
I want to walk you through the most common ways people try to leave their house
to their kids. Why
some of those shortcuts can actually backfire badly.
And why
the option that sounds a little more formal
is usually the one that gives families the best outcome.
As we go, I want you to comment below and tell me what other strategies
you have heard people use and share your stories.
It really helps people
see what others have experienced, so just put that in the comments below.
Have you heard people say just give the kids the house?
Now I just want to gift my house to my kids now.
Have you heard them?
Just add them on the title.
Have you heard them use a death deed or a transfer on death?
Have you heard them use a will?
Maybe an LLC, maybe a trust. Put it in the comments.
I want to see what advice
people are giving out there, because a lot of it is truly terrible.
And let's use a simple example.
Let's say you bought a house in Seattle years ago
for $200,000, and today it's worth 1.2 million.
This is actually first house. Everybody is about what?
It's almost identical.
I actually looked it up and I wanted to make sure that I could be right there.
And it was spot on.
Let's say you have three kids, so you bought a house for 200,000.
Now it's worth 1.2.
You have three kids and you're thinking exactly what a lot of parents think.
I want the house to go to my kids with as little cost
delay and minimize that headache.
That sounds reasonable, but most people focus on the wrong goal.
They focus on avoiding that probate, but they trigger all sorts of other nastiness.
So avoiding probate does matter.
But it's not the only issue,
because if in the process of avoiding probate, you create a gift tax problem,
or you lose your step up in basis, or you give up control,
or you hand the property to three kids
who hate each other, have creditors, have spouses, or have,
God forbid, substance abuse issues and you do not solve the problem.
You just made it worse.
So let's go through your options.
Number one is gifting the house to your kids during your lifetime.
And this I see this a lot.
This is where you sign a deed now and give the Seattle house
to your three kids while you're still alive.
People do this because it feels simple.
They think I'll handle it now and then when I'm gone.
The kids have already won.
They already own it so we can avoid probate.
And that is true.
You may actually avoid probate,
but look at what you may be giving up first.
There's usually gift tax reporting issues.
When you give away a house worth
1.2 million, you will need to file a gift tax return.
And that does not always mean immediate tax due,
but it does mean you're giving up part of your lifetime gift in estate tax
exclusion and an extra tax filing that you have to do.
So the easy plan now becomes something with tax reporting baggage.
Second, and this is a huge once your kids get your old basis
and this example you paid $200,000 for a house.
They get that basis.
So if you give it away your house during your lifetime,
your kids generally inherit the old basis.
So they get that $200,000.
So if they sell the house for 1.2 million,
there's going to be $1 million of built in gain.
If they had just simply inherited the problem
and sold it at the same amount,
they would have had zero tax due because of the step up in basis.
So you just cost your kids over
$200,000 in many cases.
And that is a giant tax problem.
You also lost your ability to use the capital gain
exclusion and the tax benefits that come with home ownership.
But that's just icing.
You lost a massive once in a lifetime tax benefit because of your strategy.
And too many people make this mistake mistake and it shouldn't happen.
Third, you gave up control.
The second you gift your house, it's not yours anymore.
Now it belongs to the kids, all three of them.
So what happens when one gets a divorce?
What happens if one gets sued?
What happens if one has creditor issues?
What happens if one has substance abuse problems?
Suddenly wants money fast?
What happens if one child cannot stand the other two and decides
to use the house as leverage or revenge?
What if they kick you out?
This is where family stories get ugly.
One wants to sell it.
One wants to rent it. One wants to move into it.
One wants to block everything just to make life miserable for everybody else.
And now you've turned the house into a legal and emotional battlefield.
And that's option one.
It's simple on paper, but it is very dangerous in real life.
Option two is adding the kids to title.
Now, as joint tenants or tenants in common, or something like that.
And that is the classic shortcut.
See it all the time.
People say, okay, well, maybe I'll not fully gift the house,
but I'll just add the kids as joint owners.
So when I die, the house passes automatically.
And again, yes, that may avoid probate, but again, that is not the same thing
as good planning because you still have a gift tax issue.
You're giving away a present ownership interest
during your lifetime, and that can still trigger gift tax reporting.
And the basis problem is they are two.
To the extent you gave away part of your house during the life.
That part generally carries over your old
basis instead of getting that full step up at death.
So the first two options are both dangerous.
If your goal is to preserve the best tax result for your kids,
and then you still have that control problem,
now your kids are co-owners while you're still alive.
That means their spouses, ex spouses, creditors, lawsuits,
bankruptcies, and bad decisions can now touch your house.
And if your kids do not get along, good luck with that one
because you just gave three different people rights
in the same property before you're even gone.
So if your goal was peace and simplicity,
this can do the exact opposite.
Option three is the transfer and death deed, also called
a TOD deed or a death deed.
This is one.
It's slightly better than the first two in some very important ways.
And why?
That's because with a transfer on death deed,
your kid do not become owners while you are alive.
That means they usually do not have the same present gift issues.
By naming them as beneficiaries.
You still control the house.
You can revoke that deed and you can change your mind.
And because the transfer happens on death, this is generally much better
than gifting during your life.
If your goal is to preserve that step up in basis, you still get
the step up in basis with the transfer on death deed.
So that all sounds pretty good.
And for some families it can be a useful tool.
But here's the problem in my experience, a death deed solves the probate issue.
It solves the step up issue.
It does not solve the family management issue.
So go back to the Seattle example.
You pass away.
Now the house goes to three kids.
Now what one has creditors that child share can become a problem.
One has a nasty divorce.
That share can become a problem.
One has addiction issues and now they are on part of a $1.2 million asset.
One hates the other siblings.
Now the house becomes that perfect instrument for revenge, and I've seen that
they can refuse to sell.
They can fight over repairs, they can fight over buyout terms,
they can drag things out and they can make everybody miserable.
And the transfer on death does not give you much control over that.
It says who gets the house.
It does not do much to manage what happens after they get it.
That is
why I say a death deed is better than just adding the kids to title now.
But it's still a blunt instrument.
It avoids probate.
It does not really protect the family from itself.
Which brings us to the best option for most family
a properly drafted and properly funded living trust.
This is usually the cleanest answer because it solves more than one problem.
A trust lets you keep control while you're alive.
You can live in the house. You can sell the house.
You still get all the tax benefits, including the capital gain exclusion.
If you sell it, you can refinance the house.
You can change the plan.
You can change the beneficiaries.
You can change the instructions.
You are not giving the house away early just to make life easier.
Later.
Then when you die, the trust controls what happens next.
That's the secret sauce.
Maybe the house gets sold and the proceeds are split equally.
Maybe one child gets the right to buy out the others.
Maybe the house stays in a trust for a while just for their benefit.
Maybe a troubled child share is protected via credit shelter
provisions smart attorneys use in their trust.
Maybe a child predisposes you and you're really dealing
with the grandkids or a spouse.
A living trust allows you to deal with that.
Maybe there are rules because, you know one child is irresponsible.
One is being sued, or one cannot be trusted
to turn the house into or not turn the house into a war zone.
That is what real planning looks like.
And if the trust is set up correctly and the house is actually in the trust,
you can usually avoid probate and preserve a much better tax result
because the House passes at death rather than being gifted away during life.
So in this example, instead of your kids inheriting your old $200,000 basis,
they receive a full stepped up basis based on the value at death,
which in our example is $1.2 million. Right.
And that's a massive difference.
It could save them hundreds of thousands of dollars.
So it's the same house, same three kids,
but a completely different tax result over $200,000.
That's massive.
And just for completeness,
yes, there are a couple of other things out there people hear about.
One is a will.
A will says who gets their house, but it does not avoid probate.
It's a greased slide right into probate and it's basically what a will
is, is instructions for the probate court, for the judge.
Another is doing nothing.
And that's not planning. That's just called leaving a mess.
There's another one.
Hey, what about using an LLC
for a family home or a house you want to pass on to your kids?
That is often solving for a different problem and and can create its own issues.
It's a different tool for a different purpose.
And does not change things.
In our example, I still want to use that living trust, for example.
So if you want the clean version, here it is.
If you're
thinking about gifting it now, that's usually bad.
That's a bad idea.
Add the kids to title. Right now.
That's usually a bad idea.
Thinking of using a transfer on that deed?
What's better than the first two?
But it's still limited.
A living trust that's the most complete answer
because it gives you control while you're alive.
Helps avoid probate preserves the once in a lifetime tax benefits
you get with that step up in basis and let you put real instructions in place
for what happens to the property, allowing you to protect your kids
and other descendants for that matter, while preserving the tax benefit.
So the step up in basis and that is the point people miss.
Estate planning is not just about who gets the house, it's
about how they get it, when they get it, what tax benefits come with it,
and whether the House becomes a blessing for the family or a curse.
All too often we see it become a curse.
So before you put the kids on title, before you gift your house
and before you grab some shortcut because it sounds easy, slow down.
The easy move can be the most expensive move, and it can be the wrong move.
This was helpful.
Hit like,
subscribe to the channel and share this with anyone who owns a house and has kids.
And in the comments, tell me what other strategies you've heard people use.
Because I promise you, there are families out there
that are getting awful advice right now and they need to see your stories.
