For many of us, our home is one of the most significant assets in our estate and we want to make sure it passes to our loved ones with ease and at the least expense. As an estate planning attorney, I am often asked if putting a child’s name on the deed to your home is a good idea. Most people think it’s a simple and inexpensive estate planning technique that will avoid probate. While it does accomplish the goal of avoiding the court probate process, it has serious implications that can cost you more than you think. Please be sure to consult with your estate planning attorney to discuss the following 5 estate planning considerations for your home.
Adding a child’s name to a deed gives him or her an ownership interest in your home. As a result, you will need them to participate in the sale or refinance of your home. Technically, any owner could take steps to sell his or her share of the property without the consent of the other owners so it’s important to seriously consider whether you want to add a child to the deed of your home.
Gift Tax Implications
As we just mentioned, adding a child’s name gives them an ownership interest and is therefore considered a gift under the law. In 2023, the gift tax exemption is $17,000 and needs to be reported to the IRS by filing a gift tax return.
Unintended Consequences to Your Estate Plan
The titling of the deed is extremely important. Adding a child’s name to your deed can be done by two types of titling- tenants in common and joint tenants with the right of survivorship. Tenants in common means each owner has an undivided interest in the property and when that owner dies, their interest passes to his or her heirs. Conversely, tenants with rights of survivorship means that when one joint tenant dies, that joint tenant’s interest automatically passes to the surviving joint tenant or tenants. It is important to note that if you add your child to the deed of your house then the distribution of your house will not follow your Will or Trust because it will automatically go to any surviving owners.
If you add your son or daughter to the title of your home, then their share of your home may be subject to their creditor claims. The bankruptcy court may be entitled to a share of your home if your son or daughter ever files for bankruptcy relief. Even more likely is the impact on your home if your son or daughter goes through a divorce. This means that your child’s former spouse may be entitled to a share of your home and is subject to a division by the court.
Tax Problems and Step-up in Basis
It is very important to consider the tax implications of adding your son or daughter to the title of your home. When an appreciated asset is sold- a good example is usually real estate or stocks- there may be a capital gains tax. Capital gain is the difference between the basis (purchase price) and the amount you receive when the asset is sold. There is a tax with some exceptions- assessed when this occurs. Adding your child to the title of your home while living means that your son or daughter will receive YOUR basis (or purchase price) in the home so when they go to sell it they will pay substantially more in capital gains tax. Conversely, if you leave your home to your son or daughter through your estate plan, then their basis gets readjusted (or stepped up) to whatever is the fair market value of the property at the time of your death.
If you are ready to get started with your estate plan today, please contact us at Sinclair Prosser Gasior to schedule your consultation.