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I Gave My Home to My Kids to Avoid Probate And Now I Am Being Evicted

As an estate planner, a common question I hear from clients is “maybe I should just give my house to my kids to avoid probate.” Other times, I have clients tell me that they already added their child to the home or a bank account thinking it will help avoid probate or allow the child to access their account when they die. I have to refrain from cringing when I hear these suggestions as the implications almost always do not accomplish what the client desires on his or her death. Transferring the Home to the Child Adding a child or other individual to your personal residence (or transferring the entire property) effectively gives an interest in such property to the child. If the home is sold, the child is legally entitled to receive a portion or all of the proceeds from the sale absent some agreement with the parent. An individual with an interest in real property is also allowed to force a sale of the residence if it cannot be partitioned – this oftentimes is not the client’s intent. A client may alternatively desire to avoid probate by transferring their personal residence to a child, but expects to continue to reside in the property for the remainder of his or her lifetime. However, the child as the legal owner can evict the parent from the home. You may be thinking – this is cruel, no one would ever do that to their parents. Sadly it can and does happen. The client may intend to transfer the property to the child for the purpose of avoiding probate, but probate may still be required to administer bank accounts and other assets on the death of the individual. In addition, I have seen these transfers create issues after death among other children or heirs as the transfer feels unfair to the other heirs or they fear the parent was taken advantage of. Properly documenting the transfer and the intent can help avoid such issues after the death of the parent. Additionally, a transfer of property during a client’s lifetime may impose unintended capital gains tax implications. When a parent transfers their residence (or a portion thereof) to a child, the child receives the parent’s income tax basis in the property. If the parent retained the property until his or her death, then the property receives a fair market value basis step-up (or step-down). Gifting real property during the owner’s lifetime is an extremely important concept as it may implicate capital gains taxes in the future or it may require a gift tax return if the gift exceeds $15,000 in value per year (as of 2020).

Case example – Sally purchased her residence in 1990 and paid $100,000. Sally’s income tax basis in the residence is $100,000.00. Sally transfers her primary residence to her son Charlie in 2020 thinking this transfer would avoid probate. Charlie receives Sally’s income tax basis of $100,000 because it was gifted to him during Sally’s lifetime. Sally dies in 2021 and the residence’s fair market value is $250,000. Charlie decides to sell the residence after Sally dies for $250,000. Because Charlie received Sally’s income tax basis in the residence, the home is subject to $150,000 of taxable gain which Charlie will need to consult with his accountant and potentially pay capital gains taxes on. If Sally continued to own her home until her death in 2021, the residence would have received a fair market value basis step-up to $250,000 which would have helped eliminate or reduce capital gains taxes when Charlie sold the home. This tax implication is often overlooked or not considered when adding a child to a home or transferring real property to a child.

Although there are appropriate circumstances to transfer or gift a residence to a child, such as Medicaid planning or reducing one’s taxable estate, there are better mechanisms such as a trust that would allow for the avoidance of probate and a fair market value basis step-up on the property to occur on the death of the parent.

Adding Child to Bank Accounts

Another issue I encounter is adding a child as a co-owner to bank accounts so the child has access to funds when the client dies. Naming a child as a co-owner of an account oftentimes creates conflict between advice received from banking institutions and Idaho law. Banks may inform the child as the remaining co-owner that they are the new owner of the account funds. However, Idaho law provides that the account funds actually belong in the decedent’s estate absent clear and convincing evidence that the decedent intended the child to inherit such funds to the exclusion of other heirs. We have witnessed and litigated cases where children are added to accounts for convenience only, but the child absconds with the assets after the death of the parent. Yes, it can and it does happen. Further, if a child has creditor issues, files for bankruptcy, or has a divorce, then these bank accounts can be subject to collection or these legal actions. Please keep in mind that joint accounts with spouses may not be subject to the same evidentiary standards after death.

Instead, a child could be added to the bank account as power of attorney or the account could be transferred into a trust and the successor trustee will have authority, without probate, to access the bank accounts held in the trust for funeral, burial, and other debts after the death of the parent.

Please consult with an estate planning professional prior to transferring any real property to children or another individuals to ensure that the intent of such transfer does not pose other unintended legal or taxable implications. If the transfer has already occurred, then it is still advisable to consult with a professional to determine if any appropriate agreement, lease, or updates to your estate plan are needed to document your intent with such transfer.

This article is not intended to replace legal advice applicable to your situation and should be used only for informational purpose. Consult with your legal or tax advisors before implementing any suggestions contained herein. Ms. Clapp‑Younggren is an associate attorney with the firm of Sandra L. Clapp & Associates, P.A. and can be reached at aclapp@clapp‑ or (208) 938‑2660.

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