How to leave property to a child. This reader wants her daughter to inherit her home, but doesn’t want her to have to go through probate.
Q: I am a 77-year old widowed woman. I have a house with a mortgage that I purchased a little over a year ago.
At the closing, I asked if I could put my daughter on the deed with me but the mortgage company wouldn’t allow it. I don’t want her to have to go through probate because this is my only asset. Is there a way I can leave the house to her so she can sell it and pay off the mortgage? There is some equity in it.
How to Leave Property to a Child
A: We’re surprised your lender wouldn’t allow you to add your daughter to the title to your home.
Usually, a lender wants to make sure that the borrower on the loan matches the owners on the title to the property. This is normal. In this situation, you are the only owner of the home, so you would be the only borrower and you’d be the only person on the mortgage to the home.
However, you wanted to add your daughter and it’s not unusual for a lender to allow a non-borrower spouse or child to be on title but not on the loan. When the lender allows it, all of the loan documents are signed by the borrower and a few documents that would also be signed by the non-borrowing owner of the home.
For example, if the lender had allowed you and your daughter to own the home and have you as the only borrower, you would have signed all of the loan documents and your daughter would have signed the mortgage as a non-borrowing owner.
Now that you have closed on the loan and the lender didn’t allow you to put your daughter on the title to the home, you have several options. The first option is to do nothing but make sure that you have a will in place giving the home to your daughter. Upon your death, your daughter would have to go to the probate court and, through probate, transfer title to her name or sell the home. Going through probate does increase some costs and can be a bit burdensome, especially if someone is grieving the loss of a loved one.
How to Leave Property to a Child with a Living Trust or a Transfer on Death Deed
The second choice is to set up a living trust. You’d transfer the title to the home to a living trust of which you would be the owner and trustee. From your perspective nothing much would change. The one difference here is that you would designate your daughter as the successor beneficiary and trustee of the trust. Upon your death, your daughter would step into your shoes.
A third option is a transfer on death (sometimes known as a TOD) instrument. This type of document is not preferred by many real estate professionals for reasons that are too complicated to go into in this column (although you can read about whether you should have a TOD or living trust here). But the transfer on death document would allow you to record a document now that would state that upon your death the home would go to your daughter.
Lastly, you can also transfer ownership of the home to you and your daughter through a quitclaim deed to hold the home in joint tenants with rights of survivorship. Upon your death the home would automatically become your daughter’s home. You should know, however, that the transfer of the home in this manner could potentially trigger the lender’s due on sale clause of the mortgage. This means, if the lender wanted to follow the documents you signed to the full extent of the language in the documents, it could say that you have violated the terms of your loan and are in default under the loan.
We’ve never seen or heard of a lender doing this under your circumstances, but you should know that it is a possibility.
One last thing you should consider are the tax consequences on your daughter. If you put your daughter on the title to the property, you’re essentially gifting her half of the value of the home. That could cause tax complications down the line, as she will lose her ability to get a stepped-up basis.
If, however, your daughter gets title to the home through a will, the living trust or the transfer on death instrument, your daughter will inherit the home at your home’s value at or around the time of your death (the stepped-up basis).
Here’s how it works: Let’s assume you purchased the home for $50,000 many years ago and now the home is worth $250,000. If she inherits the property either via your will, transfer via the trust, or through a transfer on death deed, your daughter would inherit the home at a value of $250,000. If she turns around and sells the home, she wouldn’t pay any federal income taxes on the sale. On the other hand, if you make her your co-owner, her share of the home would be a gift to her and the cost of her half would be $25,000, or half the cost of the property.
If she sells the property after you die, she’d pay federal income taxes on the increase in the value of the home from $25,000 to $125,000, or $100,000. She wouldn’t pay any tax on the other half because she’d inherit the other half share when you die and she’d not make any profit on the sale when the IRS considers your half interest worth $125,000 at the time of your death.
We hope this information helps you make a decision once you consider the value of the home, what you paid for the home, the costs involved in each scenario and your preferences in how you’d prefer to handle your particular situation. For more information, talk to a real estate attorney or estate planning attorney.