Published By
Andrea Rutherford
Associate, Estate Planning

It’s a tempting thought – why wait until I am gone?  Why not just deed the family home to my kids now?  In almost every case, this is a mistake.

A little bit of Taxation 101.  Let’s imagine a couple bought a house for $200,000 in 1990.  Now, it’s 2023 and the children are grown, maybe with their own children.  The parents deed the house to a child or children.  Ten years later, in 2033, the parents pass away and the children decide to sell the house – for $350,000.

Under this scenario, the children’s capital gain will be calculated all the way back to when the parents bought the house in 1990.

The gain is $150,000.  If the house isn’t the children’s primary residence, this entire amount is taxable capital gain.  The parents intended to give their children a house – instead, they gave them a house and a large tax bill.

So does this mean that you can’t give your children your house?

Not at all.

A properly drafted trust ensures that your children will get your house.  But by keeping some rights (such as a right to receive income if the property is rented) in the hands of the parents, the trust turns the gift into a gift upon death – a totally different ballgame under the tax laws.

Let’s look at our example under this scenario. The parents buy the house for $200,000 in 1990.  In 2023, instead of deeding the house to their children, they sit down with an attorney and create a Trust naming their children as beneficiaries.  Ten years later, the parents pass away – at that time, the house is worth $350,000.  The children sell the house a year later for $360,000.  The taxable gain is only $10,000.  So the parents have used the Trust to give the house to the kids, but they haven’t passed on the tax obligation.

Don’t be put off by the term “Trust.”  Creating a Trust is probably easier than you think.  Speak with one of our estate planning attorneys today to start creating your estate plan. The first meeting is always free.