As an experienced estate planning attorney, I've seen many well-intentioned parents consider adding their children to the title of their home. While this might seem like a simple solution to avoid probate or protect assets, it's often a risky move that can lead to unintended consequences. Let's dive into why this strategy might not be the best choice for you and your family.
Why People Consider Adding Their Kids to Their Home's Title
Before we explore the risks, let's look at why this idea is so tempting for many homeowners:
Probate Avoidance
One of the main reasons people consider adding their children to their home's title is to avoid probate. Probate is the legal process of administering a deceased person's estate, which can be time-consuming and expensive. By adding a child to the title, parents hope to transfer ownership automatically upon their death, bypassing the probate process.
Protection from Long-Term Care Costs
Another common motivation is the belief that adding children to the title might protect the home from being used to pay for long-term care or nursing home costs. The thinking is that if the parent doesn't fully own the home, it can't be claimed by care facilities or Medicaid.
While these reasons might seem logical at first glance, the reality is that adding your children to your home's title can create more problems than it solves.
The Hidden Risks of Adding Your Kids to Your Home's Title
Now, let's explore the potential pitfalls of this strategy:
Exposure to Your Children's Financial Issues
When you add your children to your home's title, you're not just giving them a future inheritance – you're giving them partial ownership now. This means your property becomes vulnerable to any financial issues your children might face.
For example, let's say you add your son, Mike, to your home's title. A few years later, Mike goes through a messy divorce. His soon-to-be ex-wife could potentially claim a portion of your home's value in the divorce settlement. Similarly, if Mike runs into financial trouble and faces a lawsuit or bankruptcy, creditors could come after his share of your home.
Complications in Refinancing or Selling
Adding your children to your home's title can also complicate any future plans you might have for the property. If you decide to refinance or sell the home, you'll need your children's permission – and potentially their spouses' permission too.
Imagine you want to downsize and sell your home. Your daughter, Sarah, who you added to the title, is going through a rough patch in her marriage. Her husband refuses to sign off on the sale unless he gets a portion of the proceeds. Suddenly, your simple plan to sell your home has turned into a family dispute.
Gift Tax Implications
When you add a child to your home's title, the IRS considers this a gift. Depending on the value of your home, you might need to file a gift tax return. While you might not owe gift taxes immediately (thanks to the lifetime gift tax exemption), it could impact your estate planning in the future.
Let's say your home is worth $500,000, and you add your son as a joint owner. You've essentially given him a $250,000 gift. This gift will need to be reported to the IRS and will count against your lifetime gift tax exemption.
Loss of Capital Gains Tax Benefits
One of the biggest financial drawbacks of adding your children to your home's title is the loss of the "step-up in basis" benefit. When you pass away, if your children inherit your home, they receive a "step-up" in the cost basis of the property to its fair market value at the time of your death. This can significantly reduce capital gains taxes if they sell the property.
However, if you've added them to the title while you're alive, they don't get this benefit for their portion of the ownership. This could result in a hefty tax bill if they decide to sell.
For instance, let's say you bought your home for $200,000, and it's now worth $700,000. If your children inherit it after your death, their cost basis would be $700,000. If they sell it for $750,000, they'd only pay capital gains tax on $50,000.
But if you added them to the title and they owned half the home, their cost basis for their half would be $100,000 (half of your original purchase price). If they sell at $750,000, they'd owe capital gains tax on $275,000 for their half ($375,000 minus $100,000).
Better Alternatives to Protect Your Assets and Your Family
So, if adding your kids to your home's title isn't the answer, what can you do to protect your assets and ensure your family's financial security? Here are some better alternatives:
Create a Revocable Living Trust
A revocable living trust is a powerful tool for estate planning. It allows you to:
- Avoid probate
- Maintain control of your assets during your lifetime
- Provide for seamless management if you become incapacitated
- Potentially reduce estate taxes
With a trust, you can ensure your home passes to your children without the risks associated with adding them to the title.
Use a Transfer-on-Death Deed
In some states, including Minnesota, you can use a transfer-on-death deed. This allows you to name a beneficiary who will receive the property upon your death, without going through probate. Unlike adding someone to the title, this doesn't give them any rights to the property while you're alive.
That being said, Transfer on Death Deeds have their own significant risks and we do not recommend them. To learn more about the hidden dangers of transfer on death deeds, click here.
Explore Long-Term Care Planning
If your primary concern is protecting your home from long-term care costs, consider long-term care planning. Insurance and certain types of trusts, such as Medicaid Asset Protection Trusts, can protect your home and life savings from long-term care and nursing home costs. If you would like to learn more, click here.
Implement Advanced Estate Planning Strategies
For those with larger estates, more advanced strategies like irrevocable trusts or family limited partnerships might be appropriate. These can provide asset protection and tax benefits without the risks of adding children to your home's title. Click here to learn more about advanced estate planning strategies.
Real-Life Scenarios: When Good Intentions Go Wrong
To really drive home the risks, let's look at a couple of real-life scenarios:
The Unexpected Lawsuit
John and Mary decided to add their son, Tom, to their home's title. They thought it would make things easier for Tom when they passed away. A year later, Tom was involved in a car accident. The other driver sued Tom and won a judgment that exceeded Tom's insurance coverage. Because Tom was on the title of his parents' home, the judgment creditor was able to place a lien on the house. John and Mary were shocked to find they couldn't sell or refinance their home without dealing with this lien.
The Family Feud
Sarah added her two children, Emma and Jack, to her home's title. She thought this would be fair and avoid any conflicts after her death. However, when Sarah needed to move into an assisted living facility and wanted to sell the house to pay for her care, Emma agreed but Jack refused. He wanted to keep the house in the family. Sarah found herself in the middle of a family dispute and unable to access the equity in her own home to pay for her needed care.
The Capital Gains and Gift Tax Surprise
I once had a client contact me with a number of questions and concerns about the sale of her mom’s home. Unbeknownst to her, her parents had put her on title to their home a number of years prior. After her dad’s passing, her mom was now selling the home to purchase a smaller one closer to her daughter. My client was contacted by the closing company to provide them with her social security number for tax reporting, her account number for the transfer of her share of the proceeds and confirming she and her husband would be there to sign off at the closing.
I explained to her that since she was an owner, she – along with her husband even though he was not listed on title - would have to sign off on the sale and, since this was not her primary residence, she would need to report her share of the proceeds on her tax return and pay capital gains tax on it. She was surprised and upset about the tax bill. I explained that she could pay the taxes out of her share of the proceeds.
She then explained that she considered it her mom’s money and that she would need to give it back to her mom post-closing so she could afford to purchase her new home. At that point I had to tell her that she would still need to pay the capital gains tax and could give the proceeds to her mom, but at that point it would be a gift for tax purposes and she would need to file a gift tax return.
To summarize: She and her husband had to sign off on the sale. She would need to pay capital gains taxes on her share of the proceeds, and then would need to file a gift tax return for the “gift” of the proceeds back to her mom so she could afford to purchase her new home.
Protecting Your Home and Your Family's Future
As we've seen, adding your children to your home's title can create more problems than it solves. Instead of taking this risk, consider these steps:
1. Consult with an experienced estate planning attorney to create a comprehensive plan that protects your assets and achieves your goals.
2. Explore options like revocable trusts and long-term care planning.
3. Regularly review and update your estate plan to ensure it still meets your needs and goals.
4. Have open conversations with your family about your wishes and your estate plan to prevent misunderstandings and conflicts in the future.
Remember, every family's situation is unique. What works for one might not be the best solution for another. That's why it's crucial to get personalized advice from a professional who understands the complexities of estate planning and elder law.
Take Action to Protect Your Assets and Your Family
Don't leave your family's financial future to chance. If you're concerned about protecting your home and ensuring your assets are passed on according to your wishes, it's time to take action.
At Roulet Law Firm, P.A., we specialize in helping families like yours navigate the complexities of estate planning and elder law. With offices in both Minnesota and Florida, we're equipped to handle your needs no matter where you call home.
Ready to take the next step? Here's how we can help:
Schedule a Consultation: Call our Florida office at (941) 909-4644 or our Minnetonka, MN office at (763) 420-5087 to schedule a personalized consultation. Or you can fill out the contact form on this page and a member of our team will reach out to you to schedule your consultation. We'll review your unique situation and help you develop a plan that protects your assets and your family's future.
If you are not yet ready to schedule a consultation and would like some additional information, here are some resources for you:
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Don't wait until it's too late. Take action today to protect your home, your assets, and your family's future. Contact Roulet Law Firm, P.A. and let us help you create a plan that gives you peace of mind and security for years to come.
