No Good Deed Goes Unpunished
Can someone explain to me where the idea comes from that adding a child's name on to a parent's Deed is a good idea? Is this something that's being talked about in the "free steak dinner" seminars or hawked by financial gurus (who are NOT attorneys) on radio shows? Is this a suggestion that your friend's neighbor's sister's child's teacher's dog walker said worked for her grandparents once upon a time?
Wherever the idea comes from, can we put a pin in it?
There is a very narrow set of facts where something like this might be beneficial to a very small percentage of the population. But, for the vast majority of folks, this is a terrible idea that could have severe consequences - for both the parent AND the child!
HERE ARE 6 REASONS NOT TO ADD YOUR CHILD TO YOUR HOUSE DEED:
1. CAPITAL GAINS TAX IMPLICATIONS
Your heirs receive a step-up in basis when they inherit the property following your death. Because the basis in the property is adjusted to the value of the property as of your date of death, this helps your heirs avoid capital gains taxes when they later sell the property.
If you add your child(ren) onto the deed while you are still living, this “step up” is lost.
Here's a basic example:
Mom buys home in 1998 for $190,000. When Mom dies in 2019, that property is appraised for $310,000. If her daughter inherits the property from Mom following her death, she inherits it at the $310,000 value. When daughter sells it six months later for $315,000, the only tax obligation the daughter has is on the $5,000 growth in the six months since Mom's death.
If, on the other hand, Mom added her daughter onto the deed a few years before her death, there is NO step-us in basis. When daughter sells the property six months after Mom's death, she will pay capital gains taxes on ALL $125,000 of the growth since 1998 ($315,000 - $190,000 = $125,000).
2. GIFT TAX IMPLICATIONS
Not only have you saddled your child with a hefty capital gains tax bill after your death, but you might have also incurred a tax bill of your own! When you add your child to your deed, this is considered a gift to your child. And, that gift can be taxed!
Under federal law in 2019, gifts to an individual in excess of $15,000 during the year are subject to gift tax. I do not know where you live, but around the Triangle in North Carolina, you can hardly buy an empty lot for $15,000, much less a suitable home.
There is a special IRS tax form (Form 709) that has to be completed to document the gift and calculate any gift tax obligation.
Do you really want to file another tax return?
3. CREDITOR IMPLICATIONS
By adding your child to your deed, you are essentially making them a co-owner of the property. Now, you have exposed your home to your child's creditors. Is your child behind on their student loans? Are they being hounded by debt collectors? Do they use their Visa card to pay their American Express bill?
Do you want your home to be subject to your child's bankruptcy proceedings, tax liens, legal judgments, etc.?
In addition, now that your child has an ownership interest in your property, he or she could use your home as collateral on a loan without your knowledge. You have opened Pandora's Box without even realizing it!
4. DIVORCE ISSUES
Similar to #3, your home could also be at risk should your child's marriage crumble. North Carolina is not a community property state. When considering the assets to be divided as part of divorce proceedings, we look to whose name is on the bank account, the vehicle title, the deed and then try to make an equitable distribution of those assets. If your child's name is on your deed, you have created another asset that could be part of the marital estate to be divided in your child's divorce. Generally, gifts and inheritances are considered separate property, but if your son helped you with some of your house expenses, or helped you build a deck on the back of your house, or paid the mortgage for a couple of months when you were sick and in the hospital, then the situation is different. No, your daughter-in-law is not going to move into your house when she and your son get divorced. But, your son might have to make some financial concessions to her in exchange.
5. NO TAKE BACKS
Suppose I have convinced you that putting your child on the deed to your house is a terrible idea, but that horse has already left the barn. You would like to undo what you've done. Simple, right? You just need to sign a new deed that only has your name on it, right?
Not so easy. Your child is a part-owner of the house, too. You cannot sign a new deed unilaterally. Your child has to sign it too. Depending on the relationship you have with that child, it might not be so easy to get them on board with your plan. And don't forget that your child's creditors could prevent you from unwinding this mess (see #3 above).
Perhaps you decide you want to move to Florida, and it is time to sell the house. You'd better get your son or daughter on board with your plan, too.
Essentially, you have tied yourself and your decision-making powers to your child. You have given others the power to control what you do or do not do with your own home.
6. ILLEGAL MEDICAID GIFT
I do not practice Elder Law and do not engage in Medicaid planning strategies. However, I would be remiss if I did not at least mention this final reason why adding a child to your house deed is perilous.
Medicaid has strict rules and timelines for gifting property to others. If the transfer of property is viewed by Medicaid as an improper transfer, you will be penalized. That penalty could mean that Medicaid is not available to you at the time you most desperately need it.
When you are dealing with transfers of property of this type, you must remember that facts matter. What works in one particular situation is not a cure-all for every other situation. Do not rely on second-hand advice from your friend's neighbor's sister's child's teacher's dog walker. Do not follow blindly information you find from a generic resource like a nationally-syndicated radio or television show that is trying to appeal to people in all 50 states. Each state treats property ownership differently. Find someone you trust in your state to talk about deed transfers and how best to address your specific need.