Don’t Quitclaim Deed Your Kids Your Real Estate
A common idea when people are thinking about estate planning is to quitclaim their home to their kids.
The thinking is it will allow one to avoid probate and just make things simple.
The problem, however, is that it can create a bunch of unintended problems.
Let’s just run down the list of all the ways this is wrong. 🙂
First, quit claiming the property eliminates the potential for a step-up in tax basis.
The tax basis of property is the price it was originally paid for. When someone dies and the property is transferred to someone else, the tax code allows for a “step-up” in tax basis to the current fair market value.
This virtually eliminates and capital gains tax the property may have been subject to.
Have no idea what I’m talking about? Let’s use an example.
Let’s say mom buys a house in 1970 for $20,000. She dies in 2020 and the house is worth $720,000.
If she quitclaims the property to you, you take it with a tax basis of $20,000. This means when you go to sell it you will have to pay tax on the $700,000 worth of gain (approximately 20% or $140,000).
If she does NOT quitclaim it to you and instead gives it to you after she dies you receive the property with a tax basis of $720,000. This means when you go to sell it you pay tax only any gain over $720,000.
Second, quit claiming the property makes it the subject of your kids’ actions.
If your kid gets in a car accident and owes money for damages, they could potentially seize the house.
If they file bankruptcy – same thing.
If the kid decides to sell it, you can’t do anything about that.
Those two reasons alone should be enough not to do it right?
Some people think they want to do it for Medicaid planning.
Here’s what I’ll say about that… in some case that MIGHT be the right move. There are strategies that make sense when the math and circumstances are right.
BUT, you can’t possible know that math and if your circumstances are right without talking to an expert about it (and I’m no expert about Medicaid planning).
So, before you make any moves, talk to someone to make sure you are making a wise choice.