For many Arizona parents, leaving a family home to their children seems like a thoughtful way to pass down wealth and stability. However, doing so without careful asset protection planning can create financial and legal burdens rather than benefits. Before including your house in your estate plan, it’s important to understand the risks involved.
What Are the Risks of Leaving Your Home to Your Children?
While every family’s situation is unique, there are several common challenges that come with passing down real estate. These include unexpected tax liabilities, legal complications, and even potential family conflicts.
1. Your House Could Get Stuck in Probate
If your home is included in your will without any additional estate planning, it will likely go through probate—a court-supervised process to distribute assets. Probate in Arizona can take months or even years, delaying your children’s ability to sell, rent, or use the home. In the meantime, someone must continue paying property taxes, mortgage payments (if applicable), and maintenance costs.
One way to avoid this is by placing your home in a revocable living trust. A trust allows the property to pass directly to your beneficiaries without probate, saving time and money.
2. Your Children May Face a Big Tax Bill
Capital gains taxes are a major concern when gifting or transferring a home in Mesa. If you gift your house to your children while you’re still alive, they inherit your original purchase price as their tax basis. This means that when they sell the home, they may owe capital gains tax on the appreciation from when you first bought it—potentially a huge tax bill.
However, if they inherit the home after your passing, they receive a step-up in basis, meaning the home’s value is adjusted to the market value at the time of your death. This can significantly reduce or eliminate capital gains taxes when they sell the property. Read more in our article, What Happens If You Inherit a Parent’s House?
3. Your Home Could Be at Risk in a Divorce or Lawsuit
Once you give your home to your children, it becomes their asset—which means it’s vulnerable to financial risks. If they go through a divorce, their ex-spouse may claim a portion of the home as marital property. If they face lawsuits, bankruptcy, or other financial troubles, creditors could place liens on the house or force its sale.
Using an irrevocable trust or other estate planning tools can protect the home from these potential threats.
4. Your Children Might Not Want—or Be Able to Afford—the Home
While you may think your children will cherish the family home, they may have different plans. They might prefer to live elsewhere, already own property, or be unable to afford the costs of homeownership, including:
- Property taxes
- Homeowners’ insurance
- Maintenance and repairs
- HOA fees (if applicable)
If multiple children inherit the home, disagreements may arise about whether to sell or keep it. Without clear estate planning, this could lead to family disputes and even legal battles.
What Are Your Options for Passing Down Your Home?
If you still want your children to benefit from your home, there are better alternatives than simply leaving it in your will.
- Revocable Living Trust: Keeps the home out of probate and allows for a smooth transfer to beneficiaries.
- Transfer on Death Deed (Beneficiary Deed): In Arizona, this allows your home to pass directly to your chosen beneficiaries without probate.
- Qualified Personal Residence Trust (QPRT): Can reduce estate taxes while allowing you to continue living in the home for a set period.
Plan Ahead with a Mesa Estate Planning Attorney
Every family has unique financial and personal circumstances, so the best way to protect your home and your heirs is to consult an experienced Mesa estate planning attorney. At LifePlan Legal AZ, our estate planning attorneys can help you explore your options and create an estate plan that meets your needs. Schedule a strategy session to learn how we can help you secure your family’s future.
Reference: Investopedia (Aug. 29, 2024) “4 Risks of Giving Your House to Your Child”
