NEVER Give Your House To Your Kids (I’m a Lawyer)

[00:00:00]Picture your kids standing in your kitchen the week after you're gone and the house is already the thing they're fighting about. One wants to keep it, one wants to sell, and nobody can agree.

[00:00:09]And here's the hard part. That fight usually starts with a decision the parents made years earlier trying to do the right thing. I spent years handling real estate closings in North Carolina and the most common way parents try to hand their house to their kids is the way that causes it. There's a better way to do it and it's one that stops the whole fight before it can ever start.

[00:00:27]Number one, giving it to them and leaving it to them are two different things. So, first thing, because people mix these two up constantly, there's giving your house to your kids and there's leaving it to them and those are not the same. When I say don't give your house to your kids, I mean handing it over while you're still alive. Signing a deed now, adding their name to the title now, gifting it now, that is the move that usually backfires. Leaving it to them so they get it the right way after you're gone, that part is fine. That's the goal. And if you're the kid watching this worried about your mom or dad's house, this is the conversation to have with them gently before anybody signs anything. So, take a breath if you were planning to just put the kids on the deed, you need to pause before you make that choice. You're probably told to, I understand you're trying to do the right thing. Let me show you what that advice actually costs and then the way that works instead. Number two, gifting the house hands your kids a tax bill you could have wiped out. This is the one that costs the most and most people have not really heard of it. It's called the step up in basis. So, roughly how it works, your kids inherit your basis, well, your cost basis, which is basically the number you originally paid. Say you bought the house 25 years ago for 300,000 and now it's worth, I don't know, somewhere around a million.

[00:01:39]If you gift them the house while you're alive, they take that old 300,000 number along with it. So, when they sell, the IRS looks at the gain from 300 up to a million and taxes your kids on it. Now, here's the part that a lot of the videos can get wrong. If your kids just inherit the house after you're gone, whether that's through a will or a trust, that starting number resets to whatever the house is worth the day you die. Around a million if it were now. They could turn around and sell it and owe almost nothing in taxes. If you gift it, they keep the old number, the low number, which is what creates the tax problem.

[00:02:12]Let them inherit it and most of that gain just goes away. And to be fair, I'm not saying your kids couldn't cover the tax after a big sale. Of course they could, the money's right there in the sale. The point is you'd be handing them a six-figure bill or who knows whatever the bill would be that they never had to get in the first place. And people always assume the kids can use that home sale tax break, the one you get on your own house when you sell it, but that only works if it's their primary home, they've actually lived in it at least two of the last five years. So if they've got their own primary residence, they're probably not going to qualify for that exemption. So gifting the house doesn't save your family money most of the time. A lot of time it's what makes the tax in the first place and actually increases the cost. Number three, the day your kids are on the deed, your house is caught up in their life. Okay, say the tax part doesn't move you.

[00:03:01]You're not worried about that, your kids are keeping the house no matter what.

[00:03:04]Fair enough. Here's the next problem.

[00:03:06]The second your kids are on that title, their problems turn into the house's problems. If your kid gets sued, that creditor can come after their share of the house, your house.

[00:03:17]If your kid gets divorced, that share can get pulled into a messy divorce. If a kid falls behind on their debts, same thing for any of it. This isn't hypothetical. I had a couple, they owned a home together, then they divorced, and they never changed the deed. Once the marriage legally ended, the protection that had been keeping the house safe from each of their personal debts was gone. That's called tenancy by the entirety. And the ex-husband's judgments, five of them, attached to the house. All five had to get paid before the house could sell. Now picture that's your house and the debt belongs to your kid that you just added to the deed. And another thing parents forget is once your kid is a legal owner, can you sell the house? Can you refinance? Not without their signature. You can lose control of your own house while you're still living in it. And that's not something any parent is really going for. Number four, hand one house to a few kids and any one of them can force the sale. This is the one I see do the most damage, honestly. Say the house lands with your three kids together.

[00:04:12]It's paid off, there's no tax mess, awesome. You would think that would be a happy ending. But now three people own one house and they don't have to agree on everything that has to do with the house. So let's say two want to keep it in the family and one wants the cash. In North Carolina, that one that wants the cash can go to court and force what's called a partition sale, which means they can make the whole house get sold even if the other two want to keep it.

[00:04:36]And when that happens, the house goes and a lot of time the relationship between the kids goes with it. You can split cash between kids pretty easily.

[00:04:44]House, not so much. And leaving it to all of them equally with no instructions is kind of how you set up that fight even if you didn't mean to. Number five, the shortcuts you've read about mostly don't work here. Now if you've gone looking online and you've seen people swear by quick fixes and I've got to be straight about our state because a lot of that was written for somewhere else.

[00:05:03]The big one is a transfer on death deed where you name the kids and the house just passes to them when you're gone.

[00:05:09]Does that work in North Carolina for your house? No. North Carolina doesn't allow transfer on death deeds for real estate. We can do it on like bank accounts, investment accounts, etc. but not houses. And the other one, just adding the kids to the title, we already covered that. It's a gift with all the same problems baked in. So most of the internet shortcuts either aren't allowed here or they just make the mess instead of stopping it. After all of that, here's what actually does the job for most families and it is a revocable living trust. And I know it seems like something only rich people mess with.

[00:05:40]That's not true. Um here's what it does.

[00:05:42]You move the house into the trust and while you're alive, nothing changes for you. You live there, you can refinance, you can sell the house, you can update your plan, you can put a pool in the backyard. You stay in control the entire time. And then when you're gone, the house will go to your kids or your heirs, whoever you choose, without touching probate. They'll get that full step-in basis. And then you can do something with a trust that you can't do with a deed, which is make rules. You can tell them they must sell it and split the money evenly. You can give one kid a chance to buy out the others if they really want it so that you don't have a partition sale on the back end.

[00:06:16]Or if there is a kid that needs their share protected because they have special needs or maybe they're not good with money. Now, one honest thing because I get asked about it constantly, a revocable trust like this will not keep a house safe from nursing home or long-term care. You still control it, so it still counts.

[00:06:33]And that's a different tool in a whole different conversation to protect against, you know, your house counting for nursing home. But for keeping your family out of court, out of a tax trap, and out of a fight over the house, a revocable trust is the one. Do it this way and your kids get the house. Do it the other ways and while they'll end up with the house, they also might inherit some other problems with your name on it. Now, there's another shortcut I didn't touch, which was the life estate deed. It looks like the clean little way around everything I just said, and for some folks it's fine, but it comes with a catch that's really hard to undo and most people don't find out about it until after they've signed that document. And that one's waiting for you right here.