When reviewing a new or existing client’s estate, I’m often presented with the situation of my client owning a home with their child. Typically, their child cannot qualify to take out a mortgage on their own so mom and dad push in and co-sign with them.
When this happens, careful planning is required so that in the event of the death of the child or of the parents, a Probate court action is not triggered to pass on the portion owned by either.
One option that can be utilized is owning the property as a joint tenancy if the property is a California property. With a joint tenancy vesting, the property would default to the survivor in the event of a death. However, there are many shortcomings to be aware of to this vesting on the property deed.
One such shortcoming is that if the child is married, the property that their spouse may be financially contributing to could lose the property to his or her in-laws if the child passed. Now you may be thinking, why couldn’t mom and dad just quitclaim the property back to their son-in-law or daughter-in-law if their child predeceased them?
They could if they both had the capacity to do so. Meaning, if one or both mom and dad no longer had capacity to sign legal documents, they may not be able to. Secondarily, if they were to quitclaim the property to their surviving son-in-law or daughter-in-law, they could inadvertently trigger a due-on-sale clause in the mortgage accelerating the total balance due on the mortgage and could cause a property tax reassessment for the portion quitclaimed.
Another pitfall to quitclaiming the property back to son-in-law or daughter-in-law is that they would be required to report the transaction as a gift (if the value of the gift interest was over $38,000 – 2025) by filing a gift tax return which would in turn not only have costs associated with its filing but would reduce the parents’ available federal estate and gift tax exemption amount (the amount they can pass to others during their lifetimes and/or upon their death, or some combination thereof).
You also need to be aware of the issues above if you attempt to quitclaim your half of the property to your son or daughter at some point before the mortgage is paid off and even once it is (i.e., property tax reassessments and gift tax consequences).
If you have already purchased property with your son or daughter, you may want to consider the following things. It may be advisable to vest the property regarding your ownership interest to your revocable trust and make sure you have a specific bequest of your interest back to them or to them and their spouse upon the death of you both.
In this scenario, your son or daughter should also strongly consider holding title to their portion of the property in a revocable trust either as a community property or separate property interest if it’s a joint trust with their spouse. The reason this is important is three-fold: (1) it can ensure there is a step-up in basis when there is a death for that person’s interest passing to the designated beneficiary; (2) the interest held in trust will avoid a Probate court action when it gets transferred, (probate is expensive, time-consuming and stressful); and (3) it will help ensure the property interest goes to the intended party if there is a death.
An additional bonus is that during an incapacitating event, the successor Trustee of the trust can manage the incapacitated person’s interest in the property without court interference.
Every situation is unique. Before you sign any deeds (or ideally before you decide how you will purchase a property), it’s wise to consult with your attorney to make sure you don’t fall into any of these traps and that you can best prepare to triage any potential issues.
If you, a friend, or family member need help establishing or restating an estate plan, please reach out to our Intake Department at 760-448-2220 or at https://www.geigerlawoffice.com/contact.cfm. We have offices in San Diego and Orange Counties, but we assist can families throughout California as well.
