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Should I add my children as Co-owners on the Deed to my home? The short answer, almost always, is NO, please don’t! But there are exceptions. As an Estate Planning Attorney and a licensed Title Officer, I have seen several parents attempt such a deed to avoid attorney fees, probate, medical liens, taxes or even to qualify for Medicaid. Unfortunately, in nearly every case, the transfer actually made things worse.
ISSUES CREATED FOR THE PARENT:
The biggest concerns are creditors and control. If your child at any time prior to your death owes a large sum of money and can’t pay it, your home can end up in the crossfire. When you sign a deed adding your child to your property as joint tenants, your child has become a joint owner. If during your lifetime your child ever has difficulty paying their debts, a court can order your home to be sold. If the deed shows one parent and one child as co-owners, the court will take 50% from the sale of the home to pay the child’s debts.
Some parents may transfer their home to their children early to avoid having a lien placed on the home for medical costs or to qualify for Government benefits programs. The big problem here is that a transfer like this can actually disqualify you from receiving Government benefits. Medicaid will look back five years from the date you seek benefits to see if you gave away any significant assets like your home. If you have made a gift, you will be required to wait five full years before receiving any assistance by Medicaid.
Another problem is control of the home. Anyone listed on a deed to a home is an owner of the home. If you need to refinance the home, sell it, or use it as collateral on a loan, your children will need to first approve of your actions and then sign with you on the loan or sale documents. If you decide you want to take your children off of the title, your children can choose whether they will sign a deed giving you their share. They don’t have any legal requirement to do this, unless they have somehow committed fraud or otherwise unfairly pushed you to add them to the deed in the first place. If you get your children to sign a deed selling the home, they have the right to claim their share of the sale proceeds. If you and one child are listed as the only owners, your child will have the right to claim 50% of the sale proceeds of your home.
This extends to the sale of your home after your death. If a child is listed as a joint tenant on the home, they legally have the right to keep the home to themselves. I have seen some people add a child to their home as a joint tenant, and then tell that child to sell the home after the parent’s death and divide the proceeds of the sale to all of their children equally. No matter what you have written in your will or trust, if a child is a joint tenant, they will have the right to keep the home and not share the proceeds of a sale with anyone. Even if you know you can trust that child, what happens if they marry someone you don’t trust, and then your child becomes injured and the person you don’t trust becomes their power of attorney or guardian? At that point, someone you did not plan for is in control of your assets.
ISSUES CREATED FOR THE CHILDREN:
Imagine if your child opened a gift of great value, only to learn later that they now have a large Federal tax bill to pay on that gift? The years that have passed since you purchased your home will normally increase your home’s value. If you have lived many years in the same home, the increase may be in the hundreds of thousands. When you sell that home, federal capital gains taxes will be due on that increase in value, unless the person selling the home has lived for two out of the last five years in the home. If you have added one or more children to your deed prior to your death, when you die, they will sell the home and learn they owe the taxes on that increase in value, which may be as high as 20%. In extreme cases, they may choose to spend the next two years living in the home before selling it. Or they may simply avoid reporting the sale on their taxes. Sale of a home is easily tracked by the IRS, and will be obvious in an audit. Your children, if they fail to report and pay these taxes could be fined, or worse, jailed for fraud.
One exception to this tax problem can be when a child lives with their parent for at least two years prior to their parent’s death. For this to work, the equity in the home must not exceed the maximum tax exclusion of $250,000 for individuals and $500,000 for couples. More than half the homes in Utah are currently worth over $500,000, and many homes have no mortgage when the owner dies. If the home value were just $10,000 more than the exclusion, your children could be forced to pay $2,000 in capital gains taxes. Normally your children already have a home and don’t intend to move into your home before or after your death.
COMPLETE WAIVER OF CAPITAL GAINS TAXES
The easy answer to the tax problem is to simply wait to give your children your home at your death. Current federal law waives all capital gains taxes up to the date of your death. This can be an enormous savings for your children.
WHAT IF I ALREADY ADDED MY CHILD TO THE DEED ON MY HOME?
Fortunately, this transfer can be reversed while you are still alive. A home gifted to a child can be gifted back to you. If you explain the tax consequences, your child will likely be grateful to avoid this costly mistake.
TRUSTS MAKE ALL THE DIFFERENCE
If you own a home or other real estate, the smoothest way to transfer your property to your children is using a Trust. Without a Trust, your children will someday need to retain an attorney to file a Petition to open a probate after you die. This will cost them a few thousand dollars and the court process can take from a couple of weeks to a few months. During that time, your children will need to pay the attorney and continue to make payments on the mortgage, HOA, property taxes, and other monthly home related costs until a Judge gives one of the children the right to list and sell the home.
With a Trust, you have total control of how and when assets like your home will be sold and distributed to your heirs. A Trust will empower your children to sell the home right after your death without going to probate. They will then follow your requirements set in the Trust for how, when and who will inherit. Take control of your assets and create your Trust today!