This is a question I hear frequently from individuals seeking to pass property to their heirs and avoid probate, which can be a lengthy and expensive process.
Adding your child as a joint tenant on your home or deeding your home to your child during your lifetime may seem like an easy and inexpensive solution. However, it can lead to undesirable consequences including loss of control of the property, loss of the property through creditors or divorce, loss of step-up in basis and gift tax concerns.
Loss of Control of Property
Adding your child to your deed as a joint tenant gives the child an ownership interest in the property. If you decide you want to sell the property, you will need your child to agree and sign off on the deed. You also lose control of the disposition of your property.
By adding one child as a joint tenant on your home or deeding your home to one child during your lifetime, you are putting that child in control of the disposition of the property and may be creating conflicts concerning the equitable distribution of assets at your death among your heirs.
Loss of Property Through Divorce or Creditors
If child is married and later divorces, the child's interest in the home is included in the child's assets and can be subject to division in the divorce proceedings. Also, if your child has creditors, unpaid taxes or is involved in a lawsuit and has a judgment filed against them (i.e. motor vehicle accident), a lien could be filed on the house.
Loss of Stepped Up Basis
If your child inherits your home upon your death, the child receives a "step up in basis" to the date of death value, thus essentially eliminating any potential capital gains tax if your child sells the property soon after your death.
However, if your child is added to your home as a joint tenant or if you transfer your home to your child during your lifetime as a gift, the child will not receive a step-up in basis at your death and will take the property at your cost basis, which could create a taxable gain at the time your child sells the home.
Gift Tax Concerns
Adding a child to your deed or deeding your home to your child is considered a gift if your child does not pay for the interest they receive. If the value of the interest received is over the annual gift tax exclusion ($15,000 for 2018), a gift tax return will need to be filed. Tax implications of any transfer should be discussed with your CPA or other tax professional.
The goals of avoiding probate and distributing your assets to your heirs are better accomplished through a comprehensive estate plan.
A trust-centered estate plan and then titling the home in the trust will allow the named Trustee to step in upon your incapacity or death avoiding guardianship and probate proceedings. Upon your death, the Trustee will distribute the home according to the provisions of the trust.
Before you add your child as a joint tenant on your home or transfer your home to your child during your lifetime, you should consult with an experienced attorney to implement a plan that will accomplish your goals. Call us today at 405-701-5355.