The probate process can cost a lot and it can last a long time, too, depending on the extent of your estate. Can you avoid it by just passing your property on to your children before you die? Of course, you can. It’s your property. But that doesn’t necessarily mean it’s always a safe process.
Giving Outright Gifts
Perhaps the easiest way to give your assets to your children is to simply transfer ownership. Re-title your car in Junior’s name. Change the deed on your home so your daughter now owns the property. But this can leave you high and dry in an emergency, particularly when you’re giving cash.
Now you’re dependent upon your kids to take care of you if calamity strikes, such as if your income unexpectedly runs dry. Yes, they’re your kids, and yes, they’ll be there for you … unless, of course, Junior gets married and his spouse resists or your daughter files for bankruptcy. There are other ways to give assets during your lifetime and still retain at least a little control over them.
Creating a New Deed
You might consider changing the deed to your home so that you and your child share legal ownership. If you create a joint tenancy deed with rights of survivorship, the property will pass directly to your co-owner – in this case, your child – without necessity of probate when you die.
This option isn’t totally without risk, however. If you create a deed naming your child as a joint tenant, her creditors are perfectly within their rights to seize her share of the property to pay her debts if she doesn’t. They could actually force the sale of your home if her debts are significant enough.
A better idea might be to use a transfer-on-death or beneficiary deed. Not all states recognize these, but a growing number are beginning to do so. Check with a local attorney to find out if you have this option. You can create and record this type of a deed with your county, dictating that ownership will transfer to your child at the time of your death. During your lifetime, however, it’s yours and yours alone, safe from her creditors, and the property would transfer at your death without necessity of probate.
Creating a Living Trust
Another possibility is to create a living trust and transfer ownership of your assets into its name with your children as beneficiaries to inherit them at the time of your death. Trusts avoid probate as well, and the assets you place within a trust are safe from your children’s creditors – at least until such time as ownership is transferred to them as the trust’s beneficiaries.
When you create a revocable trust, you – the grantor – can act as trustee. You can manage the assets you place in there. You can change the beneficiaries. You can even undo the trust if you decide it wasn’t such a great idea after all.
You would name a successor trustee, someone to take over management of the trust in the event that you should become incapacitated at the time of your death. When you die, your successor trustee can transfer your assets to your children, according to your trust documents and your wishes, and close down the trust.
Be careful with this option, too, however. Make sure to have an attorney draw up the trust agreement or at least review the finished draft if you decide to write your own. You’ll want to make sure the trust is revocable. You can’t act as trustee, make changes, or undo the trust if you create an irrevocable trust.
Of course, all this giving is going to cost you in taxes … but maybe not.
You can give property to your revocable trust without incurring a gift tax because the trust operates under your Social Security number for tax purposes. In essence, you’re giving a gift to yourself, although this rule doesn’t hold true for irrevocable trusts.
But when you give your assets to your children outright, the Internal Revenue Service takes the position that you’re giving them gifts and you might be subject to the federal gift tax. This includes re-titling vehicles in their names or adding their names to your home deed if they don’t give you anything of equal value in return.
But there are ways around paying this tax out of pocket. As of 2018, you can give away $15,000 per person each year without incurring the gift tax. More valuable assets are covered, too, because the Internal Revenue Code also offers a lifetime exemption. If you give your child your home worth $300,000 that’s a lot more than the $15,000 annual exclusion but you can assign the $285,000 difference to your lifetime exemption. You would just file a gift tax return that year and indicate that this is what you want to do.
Unfortunately, the gift tax shares this lifetime exemption with the estate tax so you’ll have to reduce your available estate tax exemption by $285,000. That’s $285,000 less your heirs will have available to shield your estate from estate taxes when you die. But unless you have a very large, significant estate, this shouldn’t matter. The lifetime gift/estate tax exemption is $11.18 million as of 2018. Both the lifetime exemption and the annual exclusion can change yearly, usually increasing to keep up with inflation.
You’ll also want to give some thought to how transferring your property can affect your eligibility for Medicaid. The federal government imposes a five-year “look back” period when you apply for Medicaid coverage. The idea is to limit you from “spending down” your assets so you can qualify for care coverage.
This means that if you give away your assets within 60 months of applying, you’ll be subject to a penalty. The penalty equals the value of the property you gave away during this period divided by the cost of nursing home care in your state per month. If you gave your children $250,000 in gifts within five years of applying for Medicaid, and if care in your state averages $5,000 a month, you would not be able to collect benefits for 50 months – more than four years.
You can put the property in a revocable trust within five years of applying without incurring the penalty. These assets will count as your own assets when determining your eligibility, however, because of the Social Security issue.
- Darrow Wealth Management: Should I Put My House in a Living Trust?
- FindLaw: Irrevocable Living Trust
- ElderLawAnswers: Transferring Assets to Qualify for Medicaid
- IRS: What’s New – Estate and Gift Tax
- Marshall, Parker & Weber: The Dangers of Transferring Your Home to Your Child
- Pros and Cons of Joint Tenancy with Right of Survivorship | Mastry Law Estate Planning
- Texas Constitution and Statutes: Estates Code
- Albertson & Davidson: Revocable Trusts vs. Wills
- Elder Law Answers: Medicaid and Trusts
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.