All too often we see people make mistakes with property ownership laws that can cause emotional suffering and dangerous financial risks. One of the biggest mistakes we see is that people will often simply put their child’s name on the deed to their house instead of properly setting up a will. At face value this may seem like a good idea—it simplifies the process by removing the need to deal with a probate. But here’s the catch: that course of action only eliminates the need for interacting with a probate for the home. If there is other property in question, your child is still going to need a probate.
In reality, the disadvantages to adding your child to the deed to your home far outweigh the benefit of simplifying the process of ownership transference of one aspect of your estate. The following are some of the greatest disadvantages you need to consider.
1. Inheritance Stipulations
The law is anything but simple, and even though you add your child to the deed to your home things could turn out much differently than you planned. For example, if your child were to pass away before you do, the wording of the deed could mean that one of their children become the co-owner of your home. In these types of scenarios you are essentially relinquishing the control of your home to others in your family. Though most people would like to think they can trust their family members, people don’t always see eye-to-eye regarding the decision to sell a property.
2. Familial Tension
Sadly enough, some families experience a lot of tension when there are co-owners on the deed. Life changes can stir up powerful emotions, and if you wanted to sell your home to retire in your favorite corner of the country, the co-owner would have to agree. You might also find that it is difficult to sell your home if you are experiencing relationship stress with your loved ones. The cleaner way to avoid these situations altogether is to use a will.
3. Tax Considerations
Capital gains is one of the most infamous taxes for good reason – and it can place a heavy burden on your loved ones. After you have added your child to your deed, they will be subject to taxes on the appreciated value of your home if they choose to sell it. On the other hand, if your child were to inherit your home they acquire the value of your property on the date that you passed away – which circumvents the tax on the appreciated value of your home from when you purchased it to when you passed away.
But that’s not the only tax problem. You will also have to declare your child’s portion of the value of the home as a gift. This will apply to homes that are greater than $26,000 in value. And let’s be real – that’s just about every house on the market. If you don’t legally declare it as a gift you could face some sever consequences from the IRS.