Life estate deed wise choice

Personal Finance

May 22, 2007|By Eileen Ambrose | Eileen Ambrose,Sun Columnist

Dolores of Baltimore wants a second opinion.

The 70-year-old owns a house, but wonders if she should put the names of her four children on the deed to avoid estate taxes when she dies. She says a lawyer told her years ago that it doesn't matter as long as she named the children as beneficiaries in her will.

"But will they have to pay more taxes that way, or will it be a legal hassle for them without their having been named on the house deed?" she asks in an email.

I ran Dolores' question by two Maryland estate planning lawyers. Both advise against putting children's names on the deed - for a long list of reasons.

"You put kids' names on that house and the house becomes liable for their debts," says Lutherville lawyer Jason Frank.

Parents may be unaware that a child is being pursued by bill collectors. And if one of those creditors gets a judgment against the child, the creditor could stake a claim to the child's share of the house and force a sale.

Frank says parents sometimes figure they can take this risk because a child has a good income. But the house could be in jeopardy if the child is on the losing end of a lawsuit, say, from an accident. "People say, `Oh, my son is a doctor,'" Frank says. "That's the worst. People who get sued the most are doctors."

Putting children's names on the deed also can make their tax situation worse.

The move would be viewed as a gift, triggering gift tax reporting issues, Frank says.

If Dolores did sell her house, she likely won't owe any capital gains tax on her share of the profit - but her children would if the home is not their primary residence, says Michael Hodes, a Towson lawyer.

The children also would lose the benefit of a "step-up in basis" if their names are added to the deed now. When heirs inherit a property, the cost basis of the house for future tax purposes is stepped up from the original purchase price to its current market value. This reduces the children's tax liability when they later sell the house.

If the children are added to the deed now, they won't be eligible for the step-up in basis on their share of the house at their mother's death. Instead, they would only get a step-up on their mother's share that they inherit, Hodes says.

And it's not just taxes and creditors. Making her children co-owners of her house means Dolores would need to get their permission if she wanted to sell her home, Hodes says.

Leaving a house to children by naming them beneficiaries in a will - as Dolores' lawyer suggested - is less problematic. When she dies, her estate will go through probate, the court process where creditor claims are settled and the property is distributed. Frank says probate in Maryland is not as onerous as in some other states, though there will be legal fees and probate takes at least six months in Maryland.

The lawyers say the best option for Dolores would be to set up a life estate deed with powers. Dolores would retain the right to sell or do anything else with her house while alive, and at her death the house would go to the children without going through probate, Hodes says. They would also get a step-up in basis, Hodes says.

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