Legal Question in Real Estate Law in California

Transferring real property to one of your children while you are alive is 99.9% of the time one of the most foolish things you can do. If you have no known liability exposure at this time, it would probably be effective to avoid some future liability, but the down-sides are not speculative and they may run into the hundreds of thousands of dollars once all is said and done. The main problem is the tax treatment of transfers to children when you are alive versus by will or trust after you die. If you give the property to your child while you are alive, it may be subject to gift tax on the entire equity over $13,000 (number may have changed but around that). Then, when she goes to sell it, she will pay capital gains taxes based on what you bought it for; everything above that is taxed. If it goes to her when you die, she only pays capital gains on any increase in the value between the market value when you die and when she sells it. That can easily amount to six figures if you have owned the property a long time, or if he owns it a long time before selling it. Then, to top it all off, if you have any loans on the property, it will almost certainly be an event of default on the loan if you transfer the property to anyone without paying off the loan. So you would have to refinance the loans into her name, or the current borrowers could foreclose. Other than those issues, you have a brilliant idea.

I agree with Mr. McCormick. It has serious immediate tax ramifications. In addition to that, it may trigger a due on sale/ transfer in your deed of trust, which means the lender will want all of the principal and interest immediately upon discovering the transfer. Additionally, I think a creditor or future bankruptcy trustee could void the transfer, and still reach it as an asset. You will also have a problem of getting the property back if you have a falling out with your children in the future, and will lack proof that it was still your property.

Do yourself a favor and see a competent estate planning attorney. It may cost a little at first, but will save you a lot of money and heartache down the road.

Another negative factor to consider is the Uniform Fraudulent Transfer Act, which is found in the California Civil Code as sections 3439 - 3439.12. Among other things, the UFTA declares as fraudulent any transfer of property made for less than fair market value with the intent to "hinder, defraud or delay" a creditor or feared future creditor. The UFTA allows a court to set aside such transfers, and to impose penalties on the transferor and transferee.