So you bought your child a house.

My youngest son Nickie has had a hard time getting his life together. I recently gave him $25,000 to make a down payment on a small house because his credit was bad. I told him it would be against his inheritance. I’m leaving my estate equally to all my children and I don’t want to favor one over the other.

As it happened, I had to buy the house myself since my son’s credit is so bad. Nickie is living there, although I use it as a vacation home. He is making the mortgage payments. I intend to deed it back to him in three years, but what if something happens to me in the meantime? I want to make sure Nickie gets the house, but I don’t want to pay a lawyer to revise my will. Is there any other way it can be done?

Cloe

Dear Cloe,

Do not give Nickie the house now or even three years from now. The mortgage will remain your responsibility whether the house belongs to you or your son, and the lender could call the loan if you transfer the home entirely out of your name.

If you give him the house with a quitclaim deed and he fails to pay the mortgage, you will be stuck with the bill and the house will still belong to him. If the lender forecloses against the home if the loan falls into default, your credit will be ruined because your name is on the loan and the deed of trust recorded against the property.

A second reason not to give the house to your son is that he has shaky credit. If he has any outstanding creditors, they can put liens on the house as soon as the ink on your quitclaim deed is dry. If your son may go bankrupt, there is no point in giving him an expensive home that could be taken away from him by his creditors.

Also, if you own the home upon your death and your son inherits it from you, he will benefit from a “step-up” in cost basis that will allow him to sell the home without paying any capital gains tax. If you give him the house now, this tax break will be lost. It is better for both you and your son to keep the house in your name and leave it to him in your will or trust. When you explain the tax advantages to him, I am sure he will agree.

If he isn’t already going to inherit everything upon you death, you need to revise your estate plan to make sure he will inherit the house, but a new will, or an amendment to your revocable trust, will cost less in both money and potential aggravation than the alternatives.

As an alternative, instead of updating your estate plan you could add him to the title of the home as a joint tenant so that he can deduct the mortgage interest he pay on “your” loan from his income taxes. You wouldn’t have to update your estate plan. As a joint tenant, if you pass away first, he’ll inherit the entire property outside of probate.

Len & Rosie

The Pitfalls of not Getting Proper Legal Advice

Dear Len & Rosie,

My mother was widowed last July and is names as executor in my father’s will. They owned together a community property account with a brokerage firm, which requires a certified court appointment indicating my mother’s authority to act on behalf of the estate. This plus other documents will split the account into her account and an estate account which can then be transferred back to her account. This seems like a lot of work to simply remove a name on an account.

Sandy

Dear Sandy,

The reason why it’s not so easy to remove your father’s name from the brokerage account lies in the manner in which the account was titled. Assets titled in community property do not automatically pass to the surviving spouse like assets titled in joint tenancy or as “community property with right of survivorship”. Your father’s half of this account belongs to his probate estate and must pass under the terms of his will.

There are three means of getting your father’s name off of the account. If your father’s estate is worth less than $150,000, then your mother, assuming he left everything to her, can collect the account with a small estate declaration under California Probate Code section 13101. Assets in joint tenancy or with pay on death beneficiaries or in a trust don’t count against the $150,000.  Nor do vehicles registered with the DMV.

If your father’s estate is worth more than $150,000 and he left everything to your mother in his will, then your mother can petition the court for a Spousal Property Order. This will require a court petition and a hearing, but a spousal property order is easier, cheaper, and faster than going through probate. She could get the account in her name as quickly as a month after her first visit to the lawyer.

If your father’s will left his estate to someone other than your mother, and the estate is worth more than $100,000, then your mother, as the executor named in the will, should petition the court to probate her husband’s estate. She will have access to the money once she is appointed as executor and is granted “Letters Testamentary” by the judge, but she won’t be able to distribute the account to your father’s heirs until probate is closed, which takes on average 9-15 months after the probate petition to administer the estate is filed with the court.

Your parents could have avoided the difficulties your mother is having today by getting the proper legal advice. They could have created a revocable trust that would avoid having to go to court on the second death as well as the first, or they could have simply titled their accounts as joint tenants or as community property with right of survivorship. When your mother meets with a trusts and estates attorney to take care of her husband’s estate, she should also take the time to create an estate plan to save her children time and money after her death.

Len & Rosie