Many people engage in legitimate strategies to keep their estates out of probate. Usually, avoiding probate is a good idea because it keeps your loved ones from having to undertake the often long, complicated process of estate administration. However, if you don’t take the right steps, you could be bringing on other problems.

One thing you may be thinking about is whether to turn your house title over to one of your adult children. Unless you do this carefully, you could be passing along a large tax obligation in exchange for the need for probate.

When your house is transferred in probate, it gets special tax treatment known as a “step-up in tax basis.” What this does it keep the appreciation of your house out of your tax calculation. And, that appreciation may be substantial.

For example, one financial planner reported that a woman bought her house for $16,000 in 1976. The current market value is around $200,000. If she had gifted the house outright to one of her children and then died, that child would have to pay an estimated $32,000 on the appreciation of the house.

What’s your goal for this transfer?

It’s important to realize that giving away your house may not have the benefits you are seeking. Yes, you will take the house out your probatable estate, but you probably have reasons for doing that, and those reasons may not be served. For example, you may hope that without your house you will be eligible for Medicaid benefits when you need long-term care. However, the Medicaid program has the right to look back five years and undo any transfers of wealth that were made for this reason.

Similarly, you won’t be able to transfer away assets before bankruptcy or when your creditors are actively dunning you. Courts do look for transfers meant to keep property intact and away from creditors.

Moreover, your child could lose the house if they are sued, go into bankruptcy or experience a divorce.

What options are there for transferring a house without undue tax liability?

There are several possibilities that you could explore with your attorney. For example, instead of transferring the house outright, you could have your attorney draft a “transfer upon death” deed. This transfers the title to the house upon your death but does not go through probate.

A living trust can be an excellent choice. Set up properly, it ensures that all of the assets covered by the trust avoid probate.

In order to specifically avoid the tax problem mentioned above, however, consider transferring the house but retaining a life interest. According to financial planner Liz Weston, Section 2036 of the Internal Revenue Code allows certain life interests (the right to continue living in the house) to keep the transfer from being considered complete until the life interest is extinguished.

There are specific rules about what constitutes a life interest for this purpose, so you should work with an experienced attorney to ensure you do the transfer properly.