Should I Add My Children to the Deed on My Home?
Should I Add My Children to the Deed on My Home? The short answer, almost always, is NO, please don’t! But there are exceptions. As an attorney and a licensed Title Officer, I have seen many parents attempt an early deed transfer to avoid attorney fees, probate, medical liens and taxes. Unfortunately, in nearly every case, the transfer actually made things worse.
ISSUES FOR THE PARENT:
The first and biggest concern is creditors and divorce. If your child at any time prior to your death either gets divorced or owes a large sum of money and can’t pay it, your home can end up in the crossfire. If you sign a deed adding your child to your property as joint tenants, your child has become a joint owner. If during your lifetime your child ever has difficulty paying their debts, a court can order your home to be sold. If the deed shows one parent and one child, the court will take 50% from the sale of the home to pay the child’s debts. The same issue appears if your child divorces. When the court divides the assets of your child and their spouse in divorce, your home may be one of those assets. This would needlessly reduce the amount your child could be awarded in the divore.
Some parents will transfer their home to their children early to avoid having a lien placed on the home for medical costs or to qualify for Government benefits programs. The big problem here is that a transfer like this can actually disqualify you from receiving Government benefits. Medicaid will look back five years from the date you seek benefits to see if you gave away any significant assets like your home. If you have made a gift, you will be required to wait five full years before receiving any assistance by Medicaid.
Another problem is control of the home. Anyone listed on a deed to a home is an owner of the home. If you need to refinance the home, sell it, or use it as collateral on a loan, your children will need to approve of your actions and sign with you on the loan or sale documents. If you decide you want to take your children off of the title, your children will need to sign a deed giving you their share. They don’t have any legal requirement to do this, unless they have somehow committed fraud or otherwise unfairly pushed you to add them to the deed in the first place. If you do get your children to sign off on home sale documents, they have the right to claim their share of the sale proceeds. If you and one child are listed as the only owners, your child will have the right to claim 50% of the sale proceeds of your home.
ISSUES FOR THE CHILDREN:
Imagine if you opened a gift of great value, only to learn later that you now have a large Federal tax bill to pay on that gift? The years that have passed since you purchased your home will normally increase your home’s value. If you lived many years in the same home, the increase may be in the hundreds of thousands. When you sell that home, federal taxes will be due on that increase in value unless the seller has lived for two out of the last five years in the home. If you have added one or more children to your deed, when you die, they will sell the home and learn they owe the taxes on that increase in value, unless they want to spend the next two years living in the home. One obvious exception to the tax problem is when a child lives with their parent for at least two years prior to death.
Normally your children already have a home and don’t intend to move into your home before or after your death. If you give your children your home at your death through a Will or Trust, current federal law allows your children to avoid paying any tax on the increase in value. This can be an enormous savings for your children.
Many of these deeds only add one of the children. This is usually set up with the parent and the child as “Joint Tenants.” When there are Joint Tenants on a deed, the survivor will instantly become the full owner after the death of the other homeowner. The parent often tells the child that the purpose of adding them to the deed is so this child can sell the home and divide the sale funds between all of the children after the death of the parent. The first problem here is that once you pass away, the home is legally owned by the surviving child named on the deed. They have no legal obligation, even if your will specifically states it, to give any portion of the home sale to the other children. Joint Tenancy can skip probate, but it can also work against your wishes.
TRUSTS MAKE ALL THE DIFFERENCE
If you own a home or other real estate, the easiest way to transfer your property to your children is using a Trust. This will allow your children to sell the home right after your death without going to probate. Without a Trust, your children will need to retain an attorney to file a Petition to open a probate, this will cost a few thousand dollars and the court process can take a few months. During that time, your children will need to pay the attorney and continue to make payments on the mortgage, HOA, property taxes, and other monthly home related costs until a Judge gives one of them the right to list and sell the home.
The cost of a Trust will always save money over going to probate or paying extra taxes to the IRS. After 15 years of practice, Ken has the skill and experience needed to make your estate plan run smoothly for you and your children. Give us a call today to set up a free consultation!