If you’re interested in deeding property to a child, there are several methods available for you to do this. However, you must make sure when transferring a house from parent to child that you don’t trigger a big tax bill for your offspring. One of the best ways to avoid such tax is to put the house in trust for the child.
Living Trust Deed Property
Probably the easiest way to put a house in trust for a child is by establishing a revocable living trust and transferring the deed to it. You serve as grantor, or creator, of the trust and control all of the assets you place in the trust, naming the child as beneficiary after your death. Once you die, the trust becomes irrevocable, meaning the terms cannot change. With such a trust, the home and other trust assets pass directly to your child without going through probate.
Qualified Personal Residence Trust
Generally, the IRS is not keen on situations where a parent gifts a home to a child but continues to live in the house. One exception is a qualified personal residence trust. The parent transfers his home to the child, and he retains the right to live there for a specific period of time. Once that period of time ends, the property is either given to the child or put into a trust for her benefit. If the parent dies during this time period, the house becomes part of the estate, but that’s exactly what would happen if the parent didn’t create the QPRT. If you want to sell the home during the period of the trust, that’s fine, as long as you buy another house with the proceeds that is subject to the QPRT. If you are still alive at the end of the trust period and want to continue living in the house, you must lease the home from your child and pay rent at a fair market value. Your child pays tax on the rental income. A QPRT is a sophisticated document, so you’ll need an estate attorney to set one up.
Estate Tax Exemption
For 2018, the federal estate tax exemption is $11.18 million, meaning only those estates with assets above that amount are subject to estate tax. If your assets are under that amount, you can leave your home to your child tax free in your will and don’t have to bother with a deed.
Many people are concerned about entering a nursing home at some point and Medicaid then taking the house if the patient doesn’t have sufficient assets to pay for very expensive nursing home care. That’s why some parents may want to deed their house to their children beforehand, in the belief that it will prevent the government from eventually taking the property. Keep in mind that Medicaid has a five-year lookback period, and transferring a house from parent to child during that five years prior to the parent entering a nursing home is a huge red flag. Medicaid will likely disallow such a transfer, so any financial planning to protect assets from potential nursing home costs requires professional advice and needs to be done more than five years before someone enters such a facility.
- Radley & Rheinhardt, P.C.: Deed to Children or Trust – Options for Transferring the Home
- MarketWatch: How to Give Your Home to Your Children Tax-Free
- ABC News: Inheritance 101: How to Leave Your Home to Your Kids
- FindLaw: Qualified Personal Residence Trusts FAQ
- New York State Society of Certified Public Accountants: Medicaid’s Five-Year Look-Back and the Importance of Advanced Planning
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.