Transferring Partial Ownership Interest to Your Children While Retaining Your Right to Live There

Last week, I discussed the dangers of transferring one’s house to children outright. However, it is possible for you to transfer partial ownership interest to your children which will result in their being the complete owners of your property after you die or give up your right to live there.

It is called a life estate. In this form of real estate ownership, you can transfer full ownership of the house to your children (or anyone else for that matter) at the event of your death while retaining the right to live in your home for the balance of your life (“life estate”).

Think of it as lifetime tenancy. In the normal rental transaction, a tenant has the right to occupy property for a specified period of time either in months or years. A life estate tenancy is for the duration of one’s life. Although your children may be designated as the full owners of the property upon your passing, they have no rights to the property while you are alive.

Transferring your real estate to your children while retaining a life estate is the best way to transfer real estate to your children while protecting your right to remain in the home.

Another option that is popular is to add a child to your deed as a co-owner and include language in the deed designating that the survivor will inherit the entire property. There is a danger to doing that that most people do not appreciate. If you transfer any portion of your immediate ownership rights in the real estate, you are transferring the right to sell that interest. As a practical matter, if you and a child for instance, have a falling out, that child can put his 50% interest on the market. That means that there would be a likely co-owner who is a stranger. The more likely scenario is that the entire home would be put on the market and sold so that the child could take his share from the proceeds. That would leave you without a home.

Is It a Good Idea to Transfer Ownership of Your Home to Your Children?

Usually not. You may want to do so because you wish to avoid probate and have your children be secure in the knowledge that the home is theirs. Further, they may have promised to let you live there as long as you want or can.

WARNING! If you give up all ownership in your home, you no longer have a right to live there.

Your children may display selfishness and greed that you would have considered unthinkable, but we know it happens all the time. What are you going to do if the house is sold out from under you?

And what if the owners experience serious debt problems and the creditors go against the home (remember, you no longer own it)? Where will you live after you’re forced out?

Please don’t misunderstand. Most children would not abuse a parent’s trust, but are you willing to bet your home on the belief that such trust will not be violated?  The temptation of money can cause even loved one to do things “out of character”.  There are better options which may allow you to “have your cake and eat it, too”. I will discuss those in next week’s blog.

What is Elderly Abuse?

Unfortunately, as America ages, there are increasing incidents of abuse of older people. That abuse is sometimes physical but is more often financial.

Physical abuse of older people is, like child abuse, typically caused by those closest to the individual. It could be a family member or a caretaker. Like the very young, many older people are unable to protect themselves from attack.

As disturbing as any physical abuse of a vulnerable person can be, financial abuse appears to be more common and harder to detect. We all know of instances where people spend money in ways that from our perspective are neither reasonable nor wise. There may be unexplained withdrawals from the individual’s bank account, for instance made out to “cash”. What was the money for? That’s not always an easy question to answer because the individual who wrote the check or authorized the withdrawal might not have a clear understanding or recollection of what it was for.

Avoiding Probate

If you live in Maryland, you may want to consider avoiding probate if you expect your total assets at the time of your death to be less than $1 million. Because the value of the estate is under $1 million, there would be no Maryland estate tax. (The Federal limit is even higher, currently at $5 million.) You can use joint accounts which means that someone else other than you has access to your accounts and upon your passing, the other individual(s) named would have “rights of survivorship”. Ownership of the account passes to them automatically upon your death.

Another account which will avoid probate is a “payable on death” account. In that circumstance, you do not share ownership of the account with anyone else but at your death, the proceeds would be distributed to those you have designated as beneficiaries on the bank forms. Likewise, you can do the same thing with brokerage accounts by what is known as “TOD” or “transfer on death” accounts.

Please be advised, however, that if your total net assets that are held in your name or in one of these types of accounts exceed $1 million, you will be subject to Maryland estate taxation.

Can You Avoid Estate Taxes?

There are Maryland estate taxes if the decedent’s assets exceed $1 million. (There is no Federal estate tax unless the amount is in excess of $5 million.) The most straightforward way to avoid some, if not all, of this tax burden is through the use of trusts. For example, if an individual has an estate valued at more than $1 million, he can choose to place up to $1 million into a trust for the benefit of his spouse or others, while insuring that the trust principal, at his spouse’s death, goes to their children without being subject to taxation. That trust is known as a credit by-pass trust. A second type of commonly used trust in Maryland is what is known as a “QTIP” trust (the acronym stands for legal gobbledygook!) which allows an individual with more than $1 million in assets to place the excess into a trust which has the effect of deferring the taxation until the second spouse dies.

Please call me if you have any questions about these trusts and whether they would be appropriate for you.

Current Death Taxes – Federal and Maryland

Under current law, the Federal estate tax exemption is $5 million. While there may be pressure in Congress in 2013 to lower this exemption amount, it is unlikely to be reduced significantly. In Maryland, the estate tax exemption is $1 million.

Maryland has no inheritance tax for those directly in the family line (for example, parents, children or grandchildren). The tax rate is 10% for all other beneficiaries with the exception of charities.