House deed inheritance

[naomiquestions]

My father owns a home that constitutes the most valuable portion of his estate. He does not have a will but has listed myself, my younger sister and my older brother as co-owners on the deed of the home. When he passes, I think he and my siblings are all assuming my father's portion of the ownership in the home will automatically be divided among the three of us, without issue. Is this the case? Or, should I encourage my father to draw up a simple will that states this clearly so there are no issues with the transfer of ownership to his three children?

 

[Just Blue]

My father owns a home that constitutes the most valuable portion of his estate. He does not have a will but has listed myself, my younger sister and my older brother as co-owners on the deed of the home. When he passes, I think he and my siblings are all assuming my father's portion of the ownership in the home will automatically be divided among the three of us, without issue. Is this the case? Or, should I encourage my father to draw up a simple will that states this clearly so there are no issues with the transfer of ownership to his three children?

What state?

 

[Taxing Matters]

When he passes, I think he and my siblings are all assuming my father's portion of the ownership in the home will automatically be divided among the three of us, without issue. Is this the case?

That will be the case if all of you own the property jointly as joint tenants with right of survivorship (JTWROS). However, if you own it together as tenants in common (TIC) then what happens is that his share of the property then goes to his estate. If he is not married at the time he dies and his only children were the 3 of you kids and assuming that all 3 of you kids are living when he dies then in every state ultimately his share would get divided among the 3 of you anyway under the intestate succession law. However, if there were any other kids of his or if he's married when he dies that will change things and the exact outcome without a will would depend on the applicable state law.

Or, should I encourage my father to draw up a simple will that states this clearly so there are no issues with the transfer of ownership to his three children?

A will is always a good idea as there are usually things that end up going to the estate even with plans that pass assets some other way. His options here will depend on how the title is currently set up and the laws of his state, and you've not mentioned the state in which he lives.

By the way, transferring shares of his home to you kids before he died was not the best thing to do with respect to income tax. He should have consulted an estate planning attorney before doing that.

 

[FlyingRon]

It would seem dad is still alive. He should talk to an estate planning attorney. Giving away property before he dies (which is what "putting someone on the deed" is) is bad for both him and the recipients as TM mentions. They will adopt his low tax basis on the gifts. He needs to report the transfer if the value is over the gift tax limit ($15,000 currently, but it was lower a couple of years ago), even though there is no immediate tax due. He may have disqualified himself for certain benefits that he might need before he does eventually pass.

This may be reparable at this point if the kids are willing. At least he can get a will and other useful documents executed like advanced medical directives and medical and general powers of attorney. I can tell you our lives were made very much better when we had my mother-in-law execute these things (even though there was no estate) while she was still competent (she ended up with Alzheimers).

 

[TrustUser]

hi ron, can this mistake be corrected if the children are removed from the deed ?

 

[Ohiogal]

hi ron, can this mistake be corrected if the children are removed from the deed ?

Children CANNOT just be removed from the deed. They would have to grant the property back to their parent. And why would they quite frankly?

 

[zddoodah]

My father owns a home that constitutes the most valuable portion of his estate. He does not have a will but has listed myself, my younger sister and my older brother as co-owners on the deed of the home. When he passes, I think he and my siblings are all assuming my father's portion of the ownership in the home will automatically be divided among the three of us, without issue. Is this the case?

What will happen when your father dies depends on exactly how the deed is written. As you've explained, you, your father, and your two siblings jointly own the home. It would be unusual if each of you doesn't own an undivided 1/4 interest. The phrasing of the deed and the laws of the unidentified state where the property is located will determine what will happen when your father dies.

should I encourage my father to draw up a simple will that states this clearly so there are no issues with the transfer of ownership to his three children?

Depending on how the deed reads, a will might be completely irrelevant.

Can you quote the vesting language of the deed (with names changed/removed)? The vesting language is the language that says something like, "[father's name] grants the property described below to [name1], [name2], . . . ."

 

[Taxing Matters]

hi ron, can this mistake be corrected if the children are removed from the deed ?

While for income tax purposes Dad giving the kids a share of the property before Dad dies is not a good idea, there may be other reasons why it might make sense.

However, if there are not any really good reasons to have done it, they can fix the problem by having the kids transfer back to Dad their share of the property. That would, however, be a gift from the kids to the father. If the amount of any kid's share of the property given back to Dad plus all gifts that kid gives to Dad during that same year exceeds $15,000 the kid will have made taxable gifts to Dad and will have to report the gift on a federal gift tax return and reduce the kids lifetime unified credit against federal estate and gift taxes. If the kids do that then the income tax problem is fixed in that the entire property would get a step up in basis to fair market value (FMV) on the day he dies, which may greatly reduce the capital gains the kids pay when they sell the property later if Dad's basis in the property before death was very low. The cost of the mistake of making the gifts to the kids and the kids making the gifts back is that both Dad and kids may lose some of their unified credit. That doesn't seem like a big deal now given how high that credit currently is, but bear in mind that Biden plans to increase taxes and one of things he wants to do is reduce the unified credit. If that credit gets reduced a lot, then down the road the waste of some of that unified credit over this mistake could end up being costly.

Again, though, there are non tax considerations to think about too. Now that the transfer is done, there may be good reasons to just keep it that way, depending on the details of Dad's situation.

 

[Taxing Matters]

They would have to grant the property back to their parent. And why would they quite frankly?

They'd do it to lower their later capital gains tax when it comes to them selling the property, if they can be sure Dad will be giving them that property when he dies. That might save them a significant amount of money, depending on all the details of the house and Dad's investment in it.

 

[TrustUser]

thanks tm for your answer. it can be fixed, but there are some consequences. since you already answered ohio's question, i wont repeat it

 

[LdiJ]

I am going to quantify an example.

Dad paid 50k for the house 40 years ago. The house is worth 200k when dad dies. If the siblings simply inherit the house (were not put on the deed) then they would get a stepped up basis to fair market value, and would pay no tax at all, and maybe would even have a small capital loss when they sell the house.

If dad puts them on the deed instead. Then they get his basis of 50k, and have a capital gain of 150k which means capital gains tax of 22,500 between them. The higher the fair market value of the house, the higher the potential capital gain.

All in all, its a bad idea.

 

[Taxing Matters]

I am going to quantify an example.

For the OP's benefit, I'll clarify that your examples assume the home is sold very shortly after Dad's death. If they were to hold the home for some years after his death, they'll likely have higher gains than your examples due to further increase in the value of the home.

 

[LdiJ]

For the OP's benefit, I'll clarify that your examples assume the home is sold very shortly after Dad's death. If they were to hold the home for some years after his death, they'll likely have higher gains than your examples due to further increase in the value of the home.

True, but the gain would still be significantly lower if they are not placed on the deed prior to dad's death.

 

[TrustUser]

the gain from the time of dad's purchase to the time of dad's death is the only amount we can save. so the only question for the op to ask himself, is this enough to warrant making the change.

 

[Taxing Matters]

the gain from the time of dad's purchase to the time of dad's death is the only amount we can save. so the only question for the op to ask himself, is this enough to warrant making the change.

There are several factors to consider here; the tax issue is just one of them. That's why sitting down with an estate planning attorney is a good idea for the OP and his/her Dad at this point.