Should I give my kids the house even if they won’t speak to me? When this question came in, it made me incredibly sad. When it comes to families, issues relating to Love, Money + Real Estate abound. In this case, the house represents so much more than four walls, a ceiling and a floor: It’s a home where the bonds between parents and their children were broken. As I thought about the answer, I imagined the parents wanting to leave their children a tangible reminder of a time when life was a little better, and a little happier. Would you leave your home to your children even if they didn’t speak to you? And, if so, how would you do it?
I own our house. Our kids don’t speak to me. Should we give them the house?
Q: My wife and I own our house outright. We have two daughters, each of whom has a boy. They do not communicate with us because of some misunderstandings through the years. So, we are thinking about moving overseas.
Even with the bad blood between us, we’d still like to give them our home. Can I just change the ownership of the house now to them and pay taxes and utilities while we are still living in the house? How do you suggest we achieve this goal and lessen any tax burden?
Why do you want to give your kids the house?
A: It sounds like you don’t have any relationship at all with your children or grandchildren. That’s so unfortunate, but it explains why you might be ready to move overseas. What is less clear are your reasons for leaving them the house.
Are you trying to give them a gift that will bring in revenue over the years (if they rent the property) or are you hoping to remind them of better days? Or, perhaps you’re hoping that if you offer a big enough olive branch, someone might reach back and at least start a conversation that might lead to healing?
Giving houses to kids can cause a tax headache
As we’ve said so many times before in this column, we don’t think it’s a smart idea to just transfer ownership of the home to your children. Mostly, this is because it can generate an unnecessary tax headache. In your case, however, it’s even more worrisome: If you don’t have a good relationship with your kids, there’s nothing that would stop them from filing for eviction once the ownership has been transferred.
Consider other estate planning options
There are other better estate planning options that you can, and should, consider.
For example, you could put your home into a living trust. Once you set up a living trust, the home would be in the name of the trust. You and your wife would be the beneficiaries of the trust and control the ownership of the home, but when the last of you dies, the trust mechanism would allow your two daughters to become equal owners of the home.
For all practical purposes, owning the home in the name of the trust would be the same as holding title in your own names. While some localities may use the transfer of ownership as an opportunity to increase real estate taxes, we believe that most localities allow homeowners to transfer their homeownership into living trusts without triggering real estate tax issues.
When do you want to give them the house?
Let’s say you’re ready to move overseas next year. What do you plan to do with the home then? Would you still use it when you visit the area? Do you plan to visit the area several times a year? Do you want your children to take over the property once you’ve decamped and rent it out or, perhaps even live there? And, why wouldn’t you simply sell the property and give your children (and/or grandchildren) the cash over time?
The answers to these questions will help you decide what to do next.
Here’s what happens if they don’t accept the house gift
Let’s start with signing the property over to your children. When you give something to someone, they have to accept that gift. It’s the same thing with an inheritance. You can leave someone something in your will but they can refuse. If you simply arrange to gift the property to your daughters and they reject it, then the title to your home could be up in the air, and you might lose control of the asset altogether, which would be unfortunate.
Tax options to consider
On the other hand, if your daughters do accept the gift, they won’t get the stepped up basis in the value of the home, which could cause an unfortunate tax event down the line.
Here’s how it might play out: Let’s say you purchased the home for $100,000 and today it’s worth $500,000. If you give them the home and they turn around and sell it, their cost basis would be $100,000 — the same as yours — and they would pay capital gains taxes on the difference between the sales price and their cost basis (which includes cost of purchase, cost of sale and the cost of any capital improvements made to the property over the years you live there).
Let’s assume your daughters inherit the home after your death, and the value at that time is established to be $500,000. If they then sell the property for $500,000, assuming the stepped up basis rule remains the same, they wouldn’t owe federal income tax or capital gains tax on that $400,000 profit derived from the sale.
Consider a living trust
As long as the federal tax laws allow for a stepped up basis, we’d prefer that you use a living trust to control the property while you are alive and as a means to convey ownership of the home to your kids. It’s the safer and tax-savvier way to do things.
Having said that, your living trusts will need to show you and your wife as the trustees of the trust, at least initially. Once one of you dies, the survivor can be the sole trustee of the living trust. But when you establish the trust, you’ll need to decide who will be the successor trustee(s). Many parents name one or more of their children as successor trustees and beneficiaries of their trusts. Another benefit to using the trust is it will help avoid probate. The property should transfer automatically to whoever is named as the successor trustee(s).
If your relationship with your children improves, you can name them as trustees and beneficiaries of your trust. But if it does not, consider naming someone else (nieces, nephews, cousins, or even an organization that can stand in for you as trustee, for example) as successor trustee. Your children can refuse to act as trustees and refuse to manage or deal with the property or your other assets, leaving them hanging.
What about selling the house and cashing out?
Which is why you should consider selling the property once you’ve moved abroad or moved from the area permanently. Managing property from abroad can be difficult, and you’ll likely need some help, even if the property stays vacant. There will be ongoing expenses (insurance, taxes, repairs and ongoing maintenance) and you may have to pay a house manager to be sure the property doesn’t experience a physical problem or a weather-related catastrophe while you’re gone.
If you sell, you’ll be able to take advantage of another favorable tax rule for homeowners who sell the home they have used as a primary residence for two out of the last five years, and keep up to $500,000 in profits tax free. Once you convert the property to cash, it will be easier to invest and manage from wherever you choose to live. You can use it, give cash gifts to your children and grandchildren, set up a 529 college savings plan for each grandchild, or leave it for your daughters and grandchildren after you both die.
All of this requires some serious thought and we hope you’ll have a conversation with an estate attorney to help sort out what your next steps should be. Estate attorneys can help you go over all of your assets, help you organize management of the assets prior to your move abroad, and help you understand how things might play out in the future.
What we hope is that you’ll figure out how to reopen the lines of communication with your children, so they understand the true intent behind your actions.
Read more about gifting houses:
Using an LLC to Transfer House from Parent to Child
Should You Add a Child to Property’s Title?
Parents, Children, Estates + House Titles
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