Transferring a home to your children while you still have an outstanding mortgage can seem daunting. However, with careful planning and guidance from an experienced estate planning attorney, it is possible to gift your house to your kids in a way that benefits everyone.
This is about more than just the house itself – it’s about preserving your legacy and ensuring your loved ones are taken care of.
In this guide, we’ll walk through the most common methods of gifting a home with an existing mortgage. We’ll also share tips to avoid potential pitfalls and help ensure the transfer goes smoothly.
Four Popular Ways to Gift a House to Your Child
When mapping out your estate plan, most parents are torn between four options:
1. Gift the Home Outright
The simplest method is to transfer full ownership to your child via a warranty or gift deed. This immediately gives them the home.
However, it also makes them legally responsible for making the mortgage payments. If they fail to pay, the lender can foreclose. You also give up all ownership rights.
Outright transfers may trigger gift taxes if they are over the annual exclusion amount ($16,000 in 2023). Capital gains taxes may apply later when the home is sold.
2. Sell the Home at a Reduced Price
Instead of gifting the home, you can sell it to your child for below fair market value. This reduces potential gift taxes since it is not a gift.
You receive payment from your child up to the annual exclusion amount. Any discount below market value reduces their capital gains later.
The downsides are extra paperwork for the sale and reduced sale proceeds for you. Capital gains taxes still apply when your child eventually sells.
3. Retain a Life Estate
Another approach is retaining a life estate. You transfer the remainder interest to your children but keep a life estate interest for yourself.
This lets you still live in and use the home during your lifetime. Your child takes full ownership only after your death.
Retaining a life estate avoids gift taxes. However, it can impact Medicaid eligibility if that’s ever needed. It also limits your child’s control until you pass.
4. Transfer Ownership, Retain the Mortgage
If you wish to legally hand over the house to children but don’t want to burden them with hefty mortgage payments, you can transfer ownership while keeping the loan in your name.
However, consult a legal advisor before using this method! Retaining the mortgage without living there jeopardizes certain borrower protections.
For example, say your child stops paying. As the borrower, you’d remain responsible for making those mortgage payments to avoid default and foreclosure.
Elements to Consider When Transferring Property
Every family’s needs and goals are unique when it comes to gifting a home. Some key considerations include:
- Potential taxes – Gift, estate, capital gains, and real estate transfer taxes can all come into play. An attorney can help minimize taxes.
- Medicaid impacts – Gifting a home can create periods of Medicaid ineligibility if applied for within 5 years of transfer. Proper planning avoids this issue.
- Existing mortgage and lenders – Most mortgages require approval for transfers or acceleration of loan repayment. An attorney can negotiate with lenders.
- Protecting home from child’s creditors – If your child has debts, the home may be at risk once transferred. Trusts can help shield the home.
- Ongoing home expenses – Make sure your child can cover insurance, property taxes, repairs and other costs before transferring.
- Effect on property tax discounts – Special property tax discounts may be lost if you gift the home. An attorney explores options to retain tax savings.
This is just a sample of the many intricacies involved. Take the time to understand your family dynamics, goals, and finances to create a tailored action plan.
Expert Guidance for a Smooth Transfer Process
Based on our decades of experience helping Wilmington families transfer property from parents to children, we suggest:
- Consult an estate planning attorney – DIY transfers often result in unintended consequences. Professional legal guidance is key.
- Review all options with an advisor – Weigh the pros and cons of each method for your unique situation before moving forward.
- Have a plan for mortgage payments – Ensure your child can cover the existing mortgage before finalizing any property transfer.
- Document the transfer properly – Record the deed, trust or sale agreement per state laws to avoid future challenges.
- Communicate with lenders at each step – Most lenders require notice and approval for transfers of mortgaged homes.
- Consider both parents’ and children’s needs – An objective third-party attorney can help balance both parties’ interests.
While transferring property with a mortgage can be complex, an experienced advisor simplifies the process.
Transfer Your Home and Preserve Your Legacy
If you’re considering gifting your home to your children while still paying a mortgage, seek professional guidance from an experienced estate planning attorney.
With over a decade of experience advising Wilmington families on property transfers, estate planning, and asset protection, the team at Donaldson Law Firm can guide you through this process.
Based in Wilmington, NC, they help ensure your legacy is preserved while avoiding potential pitfalls and taxes. Contact their office today to schedule an initial consultation and get answers to your most pressing questions.
