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3 Reasons Not to Give Your House to Adult Children: Do This Instead

— September 15, 2020

It is amazing how many people work for their whole lives to pay off the mortgage on their home, but don’t protect its value when they are passing it on to their family as an inheritance.

Probate can be a really intimidating process and one that can drag out in some scenarios. A lot of people think that they can give their house to their adult children while they are still alive in order to avoid the process altogether, but there are regulations in place that dictate that doing this can be very costly and generally a mistake when it comes to estate-planning. 

There are so many ways of passing on your belongings that are more effective. In this guide, we’re first explaining why you shouldn’t pass the house on to an adult child or adult children. Before we provide you with an alternative option.

Step-Up in Tax Basis

If you give your home while you are alive then you might have to pay huge amounts in taxes, which you might be able to avoid if the home is bequeathed to go to your family after your death rather than while you are alive. This is a “step-up in tax basis” which means that the monetary value gained in the home since you have bought it does not get taxed. If you bought a house in the 70’s and it has gained hundreds of thousands of dollars in value, the gain won’t be taxable.

The step up in tax basis scheme is designed to adjust for inflation and ensure that people aren’t penalized financially. A home bought for 30k could now be worth 200k, and to pass this on to your family members you will want to make sure that you aren’t going to pay huge amounts of taxes.

Trying to avoid probate does make sense, but estate planning methods to do this should involve passing the property on after the event of your death, rather than trying to sort out your inheritance while you are still alive. It isn’t nice to think about but it certainly is an important consideration whether you think your death will be a long time in the future or not.

You Won’t Qualify for Medicaid (or You Will Get Penalized) 

Medicaid is means based, so people sometimes transfer a home to meet the qualification criteria for the Medicaid scheme. This government scheme has considered that people might try to do this and implemented a scheme to penalize those who are trying to manipulate the system.

Care for the Elderly graphic
Care for the Elderly graphic; image courtesy of geralt via Pixabay,

Medicaid states that gifts or transfers that have been made within five years of applying might lead to penalties, and a period where elder people are not even eligible to receive benefits at all. This can leave you in big trouble financially and trying to pay medical bills without assistance or the finances you have built up over the years.

You Might Risk Your Right to Live There

It seems to make sense to most people, at least those who haven’t properly done their research on the subject. You can offer to transfer ownership to your children, but continue living there. In theory this is fine, but in the eyes of the law the home now belongs to the children. This means that if there were liens on the home or assets had to be spit up after a divorce, for example, the home might be at risk.

If the child you have left the home to decides to borrow against it or risks bankruptcy in other ways then you could lose the home and not have anywhere to live out the rest of your life, which is naturally a huge concern. The best legal way to protect yourself is to ensure that while you are alive, your house stays in your name. 

Other Smart Estate Planning Ways to Transfer a House

Having read the first half of this article, there is a chance you have already ruled out transferring ownership of the home while you are still alive. So, what can you do instead? Whether you are estate planning in Los Angeles or anywhere else in the US, it is important to establish local probate laws, and legitimate, legal schemes you can make use of to reduce the tax that is paid and streamline the process of leaving your belongings, including your home, to your children.

Revocable Living Trusts

This type of trust gives the trustee the option to transfer your property to someone without it having to go through probate. The trust lets you work out how you want your assets to be divided and also saves money for those who will be inheriting from you (usually your children). The process can also be completed a lot more quickly than going through probate. This means that many of the stresses that go with probate will not be present for your family when your time comes.

Check Small Estate Laws in Your State

Each state handles probate and the transfer of property slightly differently. You should definitely do your research on the laws in your local area to see what you are allowed to do. Contact specialists in estate planning to ensure that taxation is at a minimum when you are passing on what you own to your family. In the case of property this is sometimes a little more confusing, but the value of your home might mean that you avoid probate anyway. 

Transfer on Death Deeds

The “transfer on death” deed scheme means that people can automatically set up their homes or other assets to be transferred to a loved one when they die. There may be taxes to pay on this, but it can help you to avoid probate so that you don’t leave your family with this long and drawn out process to work out who the home belongs to. 

There is another reason here to find people in the local area who are experts on estate planning. These sorts of deeds, often abbreviated to TOD, are not allowed in every state. On top of this, the rules and regulations for each state can differ slightly so that you are not necessarily allowed to transfer things across in the way you would want to.

Some states even have a different name for this scheme or a different document to sign. In Michigan, this is called a “Lady Bird deed”.

A professional estate planner will help you to get all of your plans in order and find a new way to leave your home to your family and not have to panic about the inheritance and taxation issues.


It is amazing how many people work for their whole lives to pay off the mortgage on their home, but don’t protect its value when they are passing it on to their family as an inheritance. It’s vital that you consult with professionals and ensure that you are sticking to the local state regulations so that you don’t get hit with penalties or even lose your home while you are still alive, as you can if you transfer ownership of your home to someone who is in financial trouble. There are virtually no circumstances where transferring your house straight away is wise, so you should take the time to find the best way to pass on what you’ve worked for. 

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