Over the years we have heard many people ask about or say that they plan to add their son or daughter (or granddaughter, etc) as a co-owner on their home. The reasons we have heard can be anything from avoiding probate by changing the ownership to joint with rights of survivorship, to a mistaken belief that doing so will protect the home from the cost of nursing care. It is true that preparing a deed can be done quickly and inexpensively; however, there are many misunderstandings and pitfalls surrounding adding a child (or anyone) to the title of your home.
Divorce
In the event that your child goes through a divorce, your home—or rather, their share of your home, will be subject to equitable distribution by the court. This is because the share of the home owned by your child is considered the child’ property and could be included in the “marital pot” and subject to division in the divorce. If this if the case, the court could rule that the ex-spouse of your child is entitled to a share of your home. Even worse but not as common, the court could rule that the home has to be liquidated and sold so that the ex-spouse can receive her portion of the home in cash. Either way, it is safe to say that the vast majority of people do not want their child’s ex-spouse owning a portion of their home.
Creditor Claims/Bankruptcy
If your child is subject to any claims by creditors, your property could be at risk since it is now in part owned by your child. Creditors of the child could place liens on your property, or worse, have the court force a sale of the property so that they can collect on their debts. Similar to the divorce example, if the child files for bankruptcy the home may be pulled into the bankruptcy estate to be dealt with by the court. Simply put, by adding your child to your deed, the property becomes subject to any debt or financial-related problems your child may incur.
Government Benefits Consequences for the Child
If the child that you add to the deed is receiving governmental benefits, their new ownership interest could impact their ability to receive these benefits.
Government Benefits Consequences for You
If certain eligibility requirements are met, Medicaid will pay for a person’s skilled nursing care. Adding your child to your deed and effectively giving them a portion of your property is considered an uncompensated transfer for Medicaid purposes. If you make this transfer and then need Medicaid assistance within five years, Medicaid will implement a penalty period. You then have to private pay for your care until the penalty period is over, which can translate to thousands of dollars that might have otherwise been saved.
Child Cooperation
Another issue that arises by adding a child to your home’s title is dealing with future conflict. While at the time all parties may agree on what is best, this may not always be the case. What happens in five or 10 years if you want to sell your home and move somewhere else but your child does not agree or does not have another place to live? The child owns 50% of the home so they have just as much say in how to dispose of it (or rather how not to dispose of it) as you do. By making this transfer to a child during your life, you lose control over one of your most important assets. While we like to assume that conflicts will never arise between us and our children, we have to be aware of the potential for conflict that is created by these transfers.
Death of Child
While this is a situation that no one likes to think about, it must be considered here. If you add your child to your deed as tenants in common and they pass before you, their share in the property will be distributed according to their estate planning documents, not yours. This could create a situation where your home is not being disposed of in the most practical manner or in the manner that you wanted. For example, if your child has provided a trust for their children, their share in the home could be transferred to the trust for the benefit of the children. This would mean that whoever the trustee of this trust is would have 50% control of your home. By making this transfer, you lose the ability to control who owns the other half of your property upon your child’s passing.
Capital Gains Tax Implications
This tax implication relates to what is known as a step-up in basis. Typically, one’s basis in real estate is what they paid for it. So, if you purchased a piece of real estate for $200,000 and sell it later for $250,000, you would have to pay capital gains tax on $50,000 of that sale.
When a parent dies and a child inherits the home (and was not a co-owner), the child receives a step-up in basis on the home. What this means is that their basis in the home becomes whatever the market value is at the time of the parent’s death. This can make a major difference for tax purposes, as the following example will show: If a parent purchased a home for $100,000 that was valued at $300,000 upon their passing, the child would get a basis in the home of $300,000. Then, if the child sells the home later for $350,000, the child will only have to pay capital gains tax on $50,000. If it were not for the step-up in basis, the child would have to pay capital gains tax on $250,000!
We hope that the above examples show that deeding an interest in your home to a child comes with risks and potential problems. We commonly hear concerns about avoiding probate and planning for the cost of nursing care; there are better planning alternatives available to address these and other concerns.