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