For many parents, adding an adult child to the property deed seems like an easy way to keep the home in the family while avoiding probate. But while this approach offers some benefits, there are also significant risks and potential drawbacks that should be carefully considered.
In this post, we’ll look at the pros and cons of adding your adult child to your property deed, covering issues like control over the property, creditor risks, and tax implications. We’ll also explore alternative methods to transfer property that may better suit your needs.
The Benefits of Adding Your Child to the Deed
One of the main advantages of adding your adult child to the deed is that it can help you avoid probate for that property. When you pass away, ownership automatically transfers to them, which can simplify the inheritance process and reduce legal fees. This can be an appealing option for those who want to ensure the property stays within the family without court involvement.
Potential Risks and Drawbacks
Despite these benefits, there are some significant downsides to this approach:
- Loss of Full Control
When you add your child to the deed, they become a co-owner of the property. This means you’ll need their consent to make any major decisions regarding the property, such as selling or refinancing. This shared ownership can complicate matters if your plans for the property change. - Creditor Exposure
By giving your child an ownership interest, you also expose the property to their creditors. If they run into financial difficulties, creditors could place liens on the property, and in extreme cases, the property could even be subject to foreclosure. Additionally, if your child divorces, their ownership share could become part of the marital estate, which could lead to complex legal issues. - Tax Implications
Adding a child to the deed is considered a gift, which can have gift tax implications depending on the property’s value. Additionally, if your child decides to sell the property, they could face high capital gains taxes based on the original purchase price, rather than a stepped-up basis. If they inherit the property, they typically benefit from a step-up in basis, reducing potential tax liabilities.
Alternatives to Adding Your Child to the Deed
If your goal is to pass the property to your child without probate, there are other strategies that may better suit your needs:
- Revocable Trust: By placing the property in a trust, you retain full control and avoid probate without giving up ownership rights or exposing the property to your child’s creditors.
- Irrevocable Trust (Grantor Trust): An irrevocable trust set up as a grantor trust allows you to transfer the property while keeping tax benefits like the step-up in basis. This protects the property from probate, shields it from creditors, and ensures your child receives the tax advantage if they sell the property.
- Transfer-on-Death Deed: In some states, a transfer-on-death deed allows you to name a beneficiary for the property, effectively bypassing probate without immediate changes to ownership or control.
Final Thoughts
Adding an adult child to your property deed can have lasting effects on control, liability, and tax obligations. Before making this decision, it’s essential to weigh all the pros and cons and consider whether other estate planning tools might better meet your goals.
If you’re unsure whether adding your child to the deed is right for you, reach out to discuss your options. An informed choice now can prevent unintended consequences for you and your family in the future.
