Six Reasons not to add your Child to the Deed to your Home
From time to time, someone will say to me that they have added their child’s name to the deed to their house to avoid probate. This always scares me. There is nothing worse than having to tell a client that I can't help them because they came to see me after they already transferred property. I frequently hear horror stories about what happens after these transfers. Adding a child to a deed can have unintended and even devastating consequences. In addition to the possibility your relationship with your child could deteriorate, here are six things to consider before you add a child to your deed.
1. Tax Issues. Your child may have to pay capital gains tax resulting from the gift’s loss of a step-up in basis. When you gift property to anyone, even your child, your child will receive your basis in his or her share of the property and therefore will have to have to pay additional capital gains taxes upon the later sale of the property if the property increases in value. In contrast, had your child inherited the property at your death, your child would have received a step-up in basis as of the date of death. If the house is sold soon afterwards, your child would likely owe little to no capital gains taxes.
2. Title Problems. In addition to tax issues, review your title insurance policy to determine if you must notify your title insurance company and update your policy to reflect a new owner. If you are in North Carolina and execute a ladybird deed, you should be aware that Ladybird deeds may require a waiting period after your death in order to resolve creditor claims. (More about creditor claims below.) So, although you can later change your mind with a Ladybird deed and take back the interest you are conveying, there is still a risk associated with using a Ladybird deed.
3. Acceleration of your Mortgage. If you have a mortgage, the mortgage company may be able to accelerate your loan when you transfer an ownership interest to your child or to any other person.
4. Creditor and Spousal Claims. After you have added your child’s name to your deed, your child’s creditors and spouse may claim an interest in your home and may be able to force you to sell your home so they can be paid from the proceeds. If your child delares bankruptcy, your home could be an asset in bankruptcy court. Additionally, if your property is in North Carolina and you decide to sell it, not only will your child need to sign off on the sale, your child’s spouse will have to sign off on any new deed in order to release marital property rights. Moreover, if your child is later involved in a divorce, your home could be treated as an asset in the divorce proceedings and your child’s spouse may be able to claim a marital property interest in your home.
5. Unintended Beneficiaries. If your child dies owning part of your home, your child’s interest in the home may pass to your child’s spouse and possibly his or her children. Therefore, your son or daughter-in-law may end up owning an interest in your home. You may need a partition action to resolve ownership conflicts or you may need to buy out your child's heirs and beneficiaries to regain control of your home.
6. Disqualification from Government Benefits/Medicaid Estate Recovery. If your child needs to apply for government benefits and is not living in the home, your home can disqualify your child from receiving benefits. If your child lives in the home with you and applies for government benefits due to a disability, then your home could be subject to Medicaid estate recovery when your child dies.
Your home is likely one of your most valuable assets. Be sure to get the information you need to make an informed decision about whether adding someone to your deed is the right estate planning strategy for you. Remember, once you add a child to your deed, it may be nearly impossible to get the child off later. If you have questions, contact Nancy’s assistant at 704-887-5242 to schedule a consultation with Nancy.