Parents, don’t make this common mistake! If you want to leave your home to the kids, do it the right way or you will trigger massive taxes.

Some people, in an effort to avoid probate court, will do stupid things. One of the most foolish things is when kids have their parents sign a “Quit-claim Deed” turning the home over to them before parents die. When they do that, they screw themselves out of tax advantages built into the law.

Current estate laws favor heirs when it comes to inheriting real estate. When they inherit a home, they get the home valued at the amount it was worth on the day of death. It is called a “step-up” in basis. So, even if the deceased bought the house many years earlier for only $50,000, heirs still get to claim the house at current market value – let’s say, for example, $500,000!

Why is that an advantage? Because, when heirs sell the house, taxes have to be paid on profits above and beyond the basis. So, the higher the bases, the less profit they have to claim, which means they pay less capital gains tax!

A Quitclaim Deed negates all of that. If you quit claim a home to your kids, they inherit your “basis”. That means, the amount you paid for the home (plus any major improvements) becomes their basis (instead of the stepped-up basis). That means they will make way more profit when they sell it, which translates to more capital gains taxes.

CONSUMER TIP: The best way to leave your home to your kids and avoid probate, is to put the house in a trust which bypasses probate. The trust would name a trustee to take over when you die, with instructions on how the house is to be divvied up. Another way to avoid probate is to file a beneficiary deed, which automatically transfers the home to the named “beneficiaries” at the moment of death. Of course, you can also leave the house to heirs in a conventional will, but that will have to go through probate court. Any one of these ways will have the better tax consequences than a quick-claim deed.