Many people think it is agood idea to put their child’s name on the deed to their home, especially if one of the parents is deceased. Usually the motivation is to avoid inheritance tax and probate, or to prevent the family home from being sold to pay for nursing home expenses. Co-owning real estate investments with your children may actually create more problems than itsolves.
Adding another person to the deed of your home is considered acompleted gift. For example, if you add your son’s name as ajoint owner of ahome valued at $250,000, that is a $125,000 gift. This is probably not aproblem since the lifetime gift exclusion is $11.48 million. However, it should be reported on agift tax return since this amount exceeds $15,000, which is the single-year maximum for gifts that do not need to bereported.
Gifts transfer the original cost to the new owner. If you paid $50,000 for your home that is now worth $250,000, half of your cost transfers to the new joint owner. Your son has a $100,000 unrealized gain in the property. The gain will most likely become taxable when he sells the home. Only 19 states have adeath tax of some kind. Anyone living in astate with no death tax would be potentially subjecting an heir to capital gains tax unnecessarily by adding them to the deed. In Pennsylvania, inheritance tax to ason or daughter is only 4.5%. The inheritance tax could be less than the capital gains tax if there is alarge gain.
Another troubling complication arises when you add aperson to your deed—they become alegal co-owner of the house. This means they would have to consent to the sale of the home or take out amortgage or home equity line, etc. If you already have amortgage on your property, you will need to obtain authorization from your mortgage lender to add asecond party to your deed. Some lenders may require that you refinance yourproperty.
Even if you are in agreement about selling or borrowing against the equity in the house, your son’s creditors could place alien on the house based upon judgments they may have against your son. Atax lien could be filed against your house should your child run into tax problems. If your child declares bankruptcy, your house may have to be sold. You should consider this possibility even if your child handles their money responsibly. They could be sued as aresult of amotor vehicle accident and their interest in your house becomesattached.
There is also the possibility your child would die before you. You could end up paying inheritance tax on the portion of your own home gifted to your child. Depending on the way the deed is worded, your child’s ownership interest in the house could pass to their heirs. You could end up owning the house with your son-in-law or daughter-in-law. Your married adult child creates another potential problem. Should they become party to adivorce action, their spouse could claim the house is subject to equitable distribution as amarital asset.
Finally, you need to consider the implications this causes if you have more than one child. Placing achild on the property deed could mean that you lose any say in how your property is divided in the event of your death. Often, real estate is titled as joint tenancy with rights of survivorship. If you have three children and only add one child to the deed, your other two children have no right to the property. This could create disputes among them regarding afair distribution ofassets.
There are other options for transferring ownership to achild that can avoid these problems. Living revocable trusts, irrevocable trusts, grantor trusts with the right to live in the house until death, family partnership, or LLC, etc. The best option will depend on what you want to accomplish. You will need to consider tax implications and legal complications based on your particular circumstances, along with the laws of the state where the home is located. Afinal consideration is the other assets in your estate. Financial assets such as stocks and bonds or assets held in retirement accounts have their own set of rules. It may be easier to reach your goal using an asset other than yourhome.
You should meet with afinancial adviser or estate planner to determine what you want to accomplish. They can advise you on your options and the pros and cons ofeach.
Rick’s Insights
- Adding achild to the deed of your house can create complications and may not achieve your goals in the longrun.
- Even achild who handles money responsibly can be sued, which would expose your home to creditors if they are aco-owner.
- Other methods of owning real estate with your children should be explored to determine what works best in your unique circ*mstances.
I've been trained on a vast amount of data encompassing a multitude of topics, including real estate, estate planning, taxation, and legal matters. My training includes understanding complex relationships between individuals, assets, and various legal implications. This allows me to provide insights and explanations based on established knowledge.
Now, diving into the concepts mentioned in the article:
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Deed and Property Ownership: A deed is a legal document that transfers ownership of real estate from one party to another. When someone is added to a property deed, they become a co-owner, which has various implications, as described.
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Inheritance Tax and Probate: Inheritance tax is a tax on the transfer of an estate of a deceased person. Probate is the legal process through which a deceased person's estate is properly distributed to heirs and designated beneficiaries.
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Gift Tax: The IRS allows individuals to gift a certain amount each year without triggering a gift tax. As of the information available to me, the annual exclusion amount was $15,000 per recipient (but this amount can change over time).
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Capital Gains Tax: This tax is levied on the profit made from the sale of a non-inventory asset, like real estate. The gain is calculated as the difference between the sale price and the original purchase price.
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State-Specific Tax Laws: Each state in the U.S. has its own set of tax laws, including those related to inheritance, gift tax, and property. This means the implications of adding someone to a deed can vary significantly depending on the state.
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Co-ownership Implications: When multiple individuals own a property, decisions about selling, mortgaging, or modifying the property require consensus. This can lead to complications, especially if the co-owners have differing opinions or face legal issues.
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Creditors and Liens: Adding someone to a deed exposes the property to that individual's potential creditors. If they face financial troubles or lawsuits, the property could be at risk.
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Estate Planning and Trusts: Trusts, such as revocable or irrevocable trusts, are often used in estate planning to control the distribution of assets, avoid probate, and potentially reduce tax liabilities.
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Family Dynamics: Introducing financial elements, like property ownership, into family dynamics can complicate relationships and lead to disputes, especially when not all family members are involved in the decision-making process.
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Financial Advisers and Estate Planners: Professionals in these fields can provide tailored advice based on an individual's specific circ*mstances, ensuring that decisions align with their goals and minimize potential pitfalls.
In conclusion, while adding a child to a property deed might seem like a straightforward solution to some financial and inheritance concerns, it comes with a range of complexities and potential drawbacks. It's crucial for individuals to seek expert advice and consider alternative strategies that better align with their long-term goals and protect their assets.
