Often our clients ask if they should add their adult children to the deed for their house so that the house can pass automatically to the children as joint tenants with right of survivorship when both parents are gone. The considerations are the same whether you are a single parent or a couple considering adding your children to your deed.
While adding your child or children to the deed may help avoid probate if the house is the only asset of your estate, there are at least three important reasons why it still may not be the right thing to do.
First, there are tax implications to consider. The share of the property given to the kids is considered a lifetime gift, and if the value of that share is in excess of $15,000 a gift tax return may need to be filed. That gift will count against your (and your spouse’s) lifetime exemption, which may or may not be important to you depending on the size of your estate and what the exemption is at the time you die. The exemption currently stands at just short of $12 million per person (as of September 2021) but it is set to be cut in half by 2025 and may be further reduced by legislation before then. We recommend that you consult with a CPA to see if this is an issue of concern for you.
Second is your potential liability exposure. If your child is in an accident with another person for which they are found liable, your house is now part of their assets. This means that you could be forced to sell your home to help satisfy a judgment if there is not enough insurance or other means to pay.
Third, and perhaps most important, is the income tax implication for your beneficiaries because they will lose their right to a step-up in basis. When your child or children (or other beneficiaries) inherit your house after you die, those beneficiaries are entitled to a step-up in basis on the house based on the value of the property at the time they inherit it. However, if your child were to be given that share of the house while you are alive, their basis is the equivalent of their share of the value of the purchase price of the house when you bought it. If the house is not sold before you die, only your share of the value will be stepped up. For example, let’s say you bought your house 20 years ago for $100,000. If you add your child to the deed while you are alive, that child’s share has a cost basis of $50,000 (one-half of $100,000). If the house is worth $250,000, they will have to pay a tax on the gain between the applicable basis and the sales price. If they inherit the house instead, they get a step-up in basis to what the house is worth at the time it is inherited. So, if the house is worth $250,000 at the time your child inherits it, that child’s basis for tax purposes is $250,000, instead of $175,000 (their $50,000 basis plus your stepped-up basis after death of $125,000). So, their gain will be determined by looking at the difference between the $250,000 basis at time of inheritance and the sales price (no gain to be taxed on), rather than $175,000 and the sales price ($75,000 in gains to be taxed). As you can see from this example, the step-up in basis is a very nice tax benefit that only occurs when your house passes to your beneficiaries after your death.
Every situation is unique and there may be additional reasons why adding your kids to your deed may not be wise for you or them. If you have concerns about avoiding probate or questions about how this may impact your estate plan, we recommend that you contact a lawyer who can provide you with the best advice for accomplishing your goals. Doing so will help you avoid unintended consequences and bring you peace of mind in your estate planning. The Legacy Studio Estate Law team is happy to help!