We get a lot of calls from Legal Shield Members regarding what the best way would be to transfer their property to their adult children without having to go through probate. There are several different ways you can transfer property to whomever you choose in NM. Let me briefly describe them below:
- Deed- You can deed your property to your adult child or whomever you choose. A gift by deed of real property can cause the recipient to pay more income taxes if the recipient ever sells it than the recipient would have to pay on proceeds from the sale of inherited property. The result depends on how much basis the donor has in the property under the tax laws. Both donor and recipient should get good tax advice before carrying out this type of transfer. Another consideration is the fact that once the property is transferred it is irrevocable and cannot be undone without the consent of the person you gave it to. If they refuse, your options to recover the property are very, very limited and expensive. Finally, if you deed your property to someone it is theirs and is then subject to the claims of their creditors.
- Transfer upon death deed—In New Mexico you can deed your property to whomever you choose via a transfer upon death deed which needs to be filed before your death. When someone receives your property via transfer upon death deed they will get a stepped up basis on the property and therefore the market value of the property at the time of inheritance or death is considered for tax purposes once the recipient decides to sell it at some future time. The advantage of this option is that the property remains yours and can be sold or borrowed against if necessary, and is not subject to the claims of the beneficiary’s creditors. If necessary you can revoke the Transfer on Death deed during your lifetime. This provides more flexibility than an outright deed. However that means that the property remains subject to your creditors and claims, and if you need long term care the property may be subject to those claims, meaning it would not be available to your heirs after your passing.
- Trust- You can have an attorney create a trust and then deed the property to the trust and make your adult child or whomever you chose the beneficiary of the trust upon your death. For minor children this is the best legal option. Depending on the complexity and terms of the trust you may be able to avoid many creditor claims, both yours and those of your beneficiary. The downside is that if there is an existing mortgage or other lien on the property, a transfer of the property to a trust may be a breach of the mortgage terms. There are ways to deal with this, but they are beyond the scope of this article.
- LLC- you can have an attorney create an LLC and deed the property to the LLC. At that point you no longer own the property, your LLC does, and your adult child or whomever you choose can be a member/owner of the LLC. A little known quirk in NM property tax law could cause an unexpectedly large increase in property taxes resulting from this type of transaction. Discuss this further with your lawyer or tax advisor for the details.
- Deed with reservation of life estate- You may give a deed to your adult child or whomever you choose and reserve for yourself a life estate that would keep you vested with most of the features of ownership until your death. The recipient would become the full owner of the property without probate. This is a better alternative than the creation of a joint tenancy form of ownership. Caution: this method is much more difficult to undo or reverse than either the trust, or transfer upon death options. Both donor and recipient should get good tax advice before carrying out this type of transfer as well. Additionally, this is a fairly complex type of transfer, and must be properly drafted to avoid complications.
As you can see, while there are many methods each has its own unique advantages and disadvantages. What works best for you and your family will depend on many factors, far beyond what we can discuss here. We are here to help you navigate your way through these and other options and help you come up with the best estate plan for your particular circumstances. Please give us a call at 505-948-5050 when you’re ready to discuss your options.