This is typically NOT the best way to transfer your home to your children
Clients will often ask me if it is possible to avoid probate court proceedings after their deaths by simply adding their adult children’s names to their real property deeds while they are alive. If there are no other assets in your estate that would be subject to probate (which is a big if), then it is theoretically possible to avoid probate this way. However, there are plenty of reasons not to do this. Let’s review some of them here:
1. If your children get into any financial problems — your house is now vulnerable. If a child you’ve added to your deed goes through a divorce, has tax issues, is sued by someone, or must declare bankruptcy, your house could be on the chopping block! In the worst-case scenario, you could lose your home, but even in a less than worst-case scenario, you would likely have to spend thousands of your own dollars on legal fees convincing a judge that your home should not be part of the assets subject to your child’s financial or legal difficulties.
2. Adding your child’s name to your deed is considered a “gift” for tax purposes — even if you don’t view it that way. This means unless the value of your home is ridiculously low, you will need to report this gift to the IRS.
3. If your child named on your deed dies before you do, their ownership of the property could pass to their spouse, their children, or anyone they may have named in their estate plan. Are you ready to co-own your property with such a person? This outcome will depend, in part, on the exact language used on the deed document — making it very important that you have an attorney draft or at least review the deed document for you if you are going to pursue this method.
4. If you ever need to apply to utilize the Medicaid program to help pay for Long Term Care Services, you will be asked if you have made any gifts of assets to anyone within the five years prior to submitting your Medicaid application. Adding a child’s name to your deed is deemed by Medicaid to be such a gift, and therefore may prevent you from being able to utilize Medicaid for months or years to come.
5. Adding a name to your deed makes the additional person a co-owner of the property. This means that you will need your child to agree before you can sell your home, rent it out, or obtain a loan against it. Are you comfortable giving that control to your child?
6. The last downside to discuss here is a detriment to your child rather than to you. If your child acquires your real property after your death (through your will or your living trust, for example) and subsequently sells the property, he or she will only be responsible for paying capital gains taxes assessed on any increase in value from the date of your death to the time the property is sold. For example, if your home is worth $300,000 when you die, and your daughter who inherits it upon your death sells it for $300,000, she will not owe any capital gains taxes for that sale.
However, if your daughter’s name is added to your deed while you are alive and you had originally paid $100,000 for the home, she will be deemed to have acquired her one-half ownership for half of the price you originally paid (so, $50,000). When she sells it for $300,000 after your death, she will be responsible for the capital gains taxes applied to her half which would be calculated on the $100,000 increase in value of her half. At a presumed 15% capital gain rate, your daughter now has a $15,000 tax bill she would have avoided if you would not have put her name on the deed during your lifetime. One important note here is that these tax rules can change if Congress wants them to, and there is some current discussion of changing them, though no changes are certain right now.
There is some good news though. There are ways to organize your estate so that probate court proceedings will not be required, but your desired outcomes will be achieved. What’s more, all of that can be done in a way that does not jeopardize your property based on financial troubles of your children and does not interfere with your ability to unilaterally decide to sell or borrow against your home. An experienced estate planning attorney can answer your questions about how exactly to set up your estate planning to achieve all these objectives and more.
My law firm is currently offering free telephonic, electronic, or in-person consultations concerning creating or reviewing estate planning documents.
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Robert J. Green is an Elder Law, Trust, Estate, Probate, & Guardianship Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA Benefit planning, contact Robert at 208-765-6555, Robert@KootenaiLaw.com, or visit www.KootenaiLaw.com.
This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.