What is the Best Way to Pass Property to a Child?
Passing property to children is something many parents think about. Whether it’s the family home in which they’re currently living or any other piece of real estate, most parents want to make sure that their children are beneficiaries. If you are considering passing your property to your child, visit the Burzynski Elder Law website. You can find information about probate, trust administration, or any property-related issues.
Unlike other possessions like vehicles, passing the real estate to any beneficiary can be complicated. In this regard, estate planning is key. Estate planning ensures the proper management and disposal of your assets to your children or any other beneficiaries when you pass on or become incapacitated. In most jurisdictions, adult children do not automatically inherit their parent’s property upon the latter’s death. If you want to ensure that your adult children benefit from your assets like real estate, it’s crucial that you have a sound plan in place. Estate planning helps with this.
It's crucial to remember that inheriting property comes with certain responsibilities. For example, the beneficiary of any real estate will have to consider things like property taxes and maintenance costs. Just like an heir inherits both assets and liabilities, children whose parents pass property to them will have to assume all responsibilities related to the ownership of such property.
Many parents assume that their children will automatically be glad to inherit property. This is especially true for a property like a family or vacation home. While most people would be happy with the financial gain that comes with inheriting property, some may not be too eager to assume all the responsibilities associated with such ownership. That’s why parents need to discuss all property issues with their children before committing to any course of action. For example, you may own a string of rental properties that you think your children would be happy to have. However, they may not want the responsibilities that come with being a landlord.
Ways of Passing Property to Your Child
The following are the common ways through which a parent can pass property to their children.
1) Gifting it to Your Children
Some parents may want to give their property to their kids when they are still alive. This is considered as gifting. In such cases, the best way to go about it is to use a trust. A trust is a legal arrangement in which one person grants authority over a certain property to another individual. There are different types of trusts including:
ii) Living trust
iii) Revocable trust
iv) Irrevocable trust
Using an irrevocable trust is the best option when gifting property to your children. In this type of trust, the party that grants it (grantor) cannot terminate or modify the trust terms without the express permission of the beneficiary or court order. Using an irrevocable trust to gift property to your children helps to keep such property out of a creditor’s reach. It also has positive tax implications.
2) Selling Property to Your Kids
An easy option for many parents is to sell their property to their kids if the latter can afford it. Such property sale has to be conducted at a fair marketplace value. Being family, many parents are tempted to sell their property to their children at significantly lower prices. This will have tax implications. In most jurisdictions, the difference between the sale of such a house and its fair marketplace value is taxable. Similarly, wealthy parents can loan money to their children to purchase the family home. Legally,
any such loan must be in accordance with regular interest rates or ones set by the tax authorities. For example, the Internal Revenue Service (IRS) provides minimum interest rates for loans between relatives or family members.
Some parents turn to other forms of trust to gift when selling property to their children. For example, the Qualified Personal Resident Trust (QPRT) is a type of irrevocable trust that can help a parent when selling property to their kids. It can be structured to stipulate the continued residence of the parent even after selling the property to their children. In instances where the parent outlives the stipulated period of the trust, they must pay rent as any regular individual. Also, such property will not be counted as part of the parent's estate.
3) Using a Deed Transfer
A transfer deed is a legal document that proves a property has changed ownership. One form of it is the transfer on death deed (TODD). This type of deed helps a parent keep all ownership rights of a property while still alive. However, the property is not considered part of their estate. Transfer of the property to a beneficiary, in this case, their child, takes effect only upon their death. Since the property is excluded from their parent’s estate, the beneficiary has fewer tax burdens. Not all jurisdictions recognize the legality of a TODD. It’s best to check with an experienced attorney whether this is an option in your state.
4) Bequeathing Your Property
You can choose to bequeath your property to your children in a will. This will spell out exactly what each individual will inherit. If it’s a joint inheritance of property, the will can stipulate the percentage ownership of each child. Alternatively, you can bequeath property through a revocable living trust. You simply name your child as a successor trustee. If you change your mind later on about any aspect of the property’s management or distribution, you can always modify the terms of the trust.
In instances where you name multiple successor trustees, one child may not want the responsibility of managing a property. You can always compensate for this by offering them more money in the trust instead of joint ownership. Of course, it’s best to discuss all this with your children before creating a revocable trust. This ensures that they are aware of their responsibilities as potential successor trustees.