Should you deed your house to your adult kids?
Parents always want what is best for their kids — no matter how old they are. As your children become adults, you might start wondering what to do about your family home.
Your home is a place of comfort and fond memories. It may also be one of your most valuable assets. If you’d like to eventually transfer your home to one or more of your adult children, you’ll want to do it in a way that avoids the headaches associated with the probate process.
Before I dive deeper into this topic, I’d like to invite you to attend my free lunchtime virtual presentation: “Inheritance without Headaches” on December 15, 2021. During the presentation, you’ll learn about every type of asset and how it transfers. I’ll also recommend the best way to gift each type of asset in your estate planning. Register now.
When probate is required for real estate in Iowa
If joint tenants (such as you and your spouse) own the home with full rights of survivorship, the home will transfer by law to the surviving joint tenant without the need for probate — the court-supervised process of transferring assets.
If you are the only owner listed on the deed, then the home must transfer through probate after you pass. Even if your last will and testament bequeaths the home to your child or another loved one, Iowa law requires the sale or transfer of the home to occur under the court-supervised probate process.
Deeds vs. mortgages
The individuals listed on the deed are the legal owners of that piece of real estate. However, someone can be listed on the deed even if they are not a borrower on the mortgage.
A mortgage is a contract agreement between the lender and the individual(s) purchasing the home. Because most people cannot pay for a home in cash, they borrow the money from a financial lender. In the agreement, the owner agrees to repay the lender the initial loan amount, plus interest. If they default, the lender has a legal right to repossess the house.
Usually, the borrower is listed on the home’s deed to protect their investment, but they don’t have to be. Likewise, an individual listed on the deed does not have to be listed as a borrower on the mortgage documents.
Adding your kids to the deed
As the owner of the home, you can add a new owner by signing a quit-claim deed that transfers your interest to you and your adult child. The deed then needs to be filed with your county’s recorder’s office. A quit claim deed looks like a simple document but should never be completed without the assistance of an attorney.
In Iowa, if the home is owned by only one person, then probate is required to sell or transfer the home. If you use a quit-claim deed to transfer the home to you and your children, the house will transfer to your children when you die, without the need for probate.
How to add your kids to the deed
Important Disclaimer (our attorneys required this): The following is legal information subject to changes in application through the Iowa appellate courts and Iowa statutory changes in the legislature. The following is not legal advice. Consult an attorney before taking any action regarding your real estate. Last updated on November 17, 2021.
Scenario One: You could transfer real estate to your adult children by quit-claim deed (as discussed above) in order to create a joint tenancy with full rights of survivorship. This means the real estate will legally transfer to the surviving joint tenants (your children) after your death and could avoid probate.
Scenario Two: You could transfer real estate to your adult children while retaining a life estate. This means you’ll retain ownership during your lifetime. After your death, the real estate legally transfers to the individual(s) named on the deed — in this case, your adult children. The transfer could avoid probate.
When making your decision, please keep the following in mind:
For both scenarios, Iowa Estate Recovery can charge your children to recover costs paid by the state Medicaid program if the payments were made after age 55 or if you are a resident of a nursing facility (regardless of age).
For either scenario, an attorney should draft the deed and advise you on the legal consequences. This is not a DIY situation.
For either scenario, the transfer would be exempt from real estate transfer tax. Source: Iowa Code 428A.2(11)
If you choose the second scenario, you will likely become ineligible for state Medicaid during your lifetime if you use a life estate for your primary residence. If you do not use a life estate, then the ownership of the home is exempt when you apply for Medicaid,
For both scenarios, probate will still be required if you have other real estate that is subject to probate.
For both scenarios, probate will still be required if you have personal assets subject to probate with a gross of value of more than $50,000.
For both scenarios, the child(ren) will lose the benefit of a step up in basis. This could result in a higher amount of capital gains tax compared to the scenario where the real estate is transferred through an estate to an heir.
Learn more about when probate is necessary in Iowa.
Risks of adding your kids to the deed
Depending on your situation, there are reasons why it may not be a good idea to include your children on the deed to your home.
Once you include other people on the deed, you cannot change it without their consent. They have legal ownership of the property.
To refinance your mortgage, apply for a home equity line of credit, or apply for a second mortgage, all of the owners of the property have to agree to these additional loans.
If your child is a joint tenant and has a judgment entered against them, the judgment could be entered as a lien against the house. This means the house cannot be sold without paying the judgment. If the home is also your child’s primary residence, then there will be an automatic lien put on the home in the case of a judgment.
Even if the house is transferred equally to your children after your death, only one person is probably going to live in the house, which can create conflict among your children. The one living there may not have the money to buy the ownership from their siblings. If there is a disagreement among them as to whether the house should be sold or one of the siblings should buy out the others, they may have to undergo a long and expensive litigation in court through the Iowa Partition Law (Code Section 651).
If you add your child to your deed during your lifetime, the calculation of capital gains begins from the date of transfer to the date of the sale of the real estate. If the child inherits the real estate through your estate, the calculation of capital gains begins from the date of inheritance to the date of sale. The adjustment of value to the date of inheritance is called a step up basis. The less years the real estate is owned, the lower the cost of capital gains.
Gifting your home to your kids during your lifetime
After reading through the two scenarios above and the accompanying problems that can occur, you may be thinking about transferring the house to your children right now. This also comes with risks you should consider.
If you do a full transfer of your legal interest in your home to your adult children and do not retain a life estate, you no longer have a legal right to live there and you no longer own the home. When you deed the home to another person and don’t retain a life estate or joint tenancy, you cannot change your mind later. Once the deed is signed, you are no longer an owner and no longer have ownership rights.
If you do a full transfer of your legal interest in your home and do not retain a life estate, your children will be responsible for property taxes, utilities, maintenance, and the other costs associated with home ownership.
Recommendations for transferring your home to your kids
Now that we’ve gone through the benefits and risks of different scenarios, I’d like to share two recommendations for how to transfer your home to your adult children.
Create a revocable trust and quit-claim deed the home to the trust. When the home is owned by the trust, it won’t go through the probate process to transfer or be sold.
Learn more about my Revocable Trust Package — the ultimate estate-planning bundle.
Schedule an appointment with me to set up a revocable trust.
Gift the house through your last will and testament. Although creating a revocable trust is really the best option because it avoids probate, sometimes it may not be financially feasible to do so. Even though the sale or transfer of the home has to undergo the court-supervised probate process, that will involve far fewer headaches for you and your children than a life estate or joint tenancy. The probate process requires a decision to sell or transfer the home before the estate can close. This provides a deadline for your heirs to either sell the home and receive the proceeds or for one heir to purchase the ownership from the others.
Learn more about the will and probate process in Iowa during a Will in a Day® appointment with me.
Your home is valuable — both financially and emotionally. Make sure you can gift it to your children without headaches.
