Should I add my child to the deed?

Should I add my child to the deed?

Generally no, you should not add your child to your deed and I’ll give you three reasons why:

1. Loss of step up in basis at death

Under section 1014 of the IRC, upon your death the cost basis in the property resets to the fair market value of the property.

What does that step up basis mean for you and your kids?

The step up basis means when your children go to sell your property, they generally will have to pay little to no capital gains tax on it. So, for example, if you bought a house in the 1984 for $100,000 and it’s now worth $1,000,000, then the step up basis rule may save your children close to $180,000 from capital gains taxes (assuming a $900,000 capital gain multiplied by 15% Federal income tax rate and 5% Massachusetts income tax rate - not including potential +5% fed capital gain rate if your children are in a high tax bracket, plus net investment income tax).

Put differently, if you add your child’s name to your deed, you may have just thrown hundreds of thousands of dollars away without realizing it. Now the government will get a large chunk of that money, instead of the people you care about most. 

2. Loss of control 

When you add your child’s name to the deed, you are making them a legal co-owner of the property. 

Now your child has to consent to the sale of the property or if you want to refinance the home or take out a home equity loan. You may also need to get authorization from your mortgage lender in order to have their name on the deed or else some lenders may require you to refinance the property at potentially higher rates (plus the hassle of it all), which could drive up your monthly costs.

Even if you completely trust your child, the idea that you would need their permission to do whatever you want with your house can create an awkward or inconvenient situation.

But then there’s the risk associated with the co owner (see below).

3. Increased creditor risk

Now that your child is a co-owner, his or her obligations are your obligations.

What is your child’s tax situation? Does your child owe back-taxes? 

If your child gets into a car accident, does your child have sufficient insurance to make sure they can’t go after the home? 

If your child is married, what happens to your house if he or she gets divorced? 

These are the types of questions that you’ll have to consider each day when you add someone to your deed regardless of who they are.

So, what’s the solution here?

Fortunately, there are other options to accomplish the same goal without all the above risks. For example, a simple revocable trust can allow you to avoid probate while maintaining control of the home, which is the primary concern for most clients I work with.

If you’re interested in discussing your estate planning goals or concerns, then give me a call at 781 202 6368, email jlento@perennialtrust.com, or click here to schedule your free personal consultation.

I’m always happy to help,

Joseph M. Lento, J.D.

Your Local Estate Planning Attorney

www.PerennialEstatePlanning.com

477 Main Street

Stoneham, MA 02180