Advantages and Disadvantages of Adding Your Child to the Title of Your Home

Probate is oftentimes a long, costly process, especially when bequeathing a house. The best way to avoid your home being placed in probate is to setup a living trust. However, some believe the best way to transfer a home to their child without probate is to add them to the title of their home. The problem is the drawbacks far outweigh the benefits.

What are the benefits of adding your child to your home’s title?

Since transferring a home by adding a child to the title gives the child co-ownership, the  main benefit, as mentioned before, is to reduce probate costs due to automatic inheritance.

Is this temporary, upfront relief enough to negate the disadvantages of adding a child to the title of your home?

Taxes and costs

When adding your child to the title of your home, they are only inheriting half of the current value and half of the original purchase price (also known as the basis) of the home. This means that when the child sells the home, they will need to pay capital gains tax on the difference between the basis and the sale price. And because this action is considered a gift in the eyes of the IRS, you will need to file a gift tax return.

To avoid these tax burdens, you can do one of two things:

• add your child to the title of your home through a bare trust and gift of survivorship. However, due to several government reporting requirements, this can also become extremely costly.
• File a parent/child exclusion form and homeowner’s exemption.

Legal Rights

Another disadvantage comes in the form of your legal right to the home. By adding your child to the title any sale or change will need their approval.

Creditors

Do your due diligence when it comes to your child’s debt before adding them to the title of your home. If you don’t you could be opening the door to a creditor’s ability to place a lien on the property, acquire your child’s portion of the asset, foreclose on the home, and force you to sell.

Litigation

What if you have more than one child? Adding just one child to the title may lead to arguments, resentment, and long, drawn-out estate litigation.

What’s the best alternative to adding your child to the title of your home?

A more effective pathway to transfer property is to put it into a living trust. Not only will the majority of disadvantages vanish, but this allows for a step-up in basis, which means the child will now inherit the home at its current value, and upon sale, will owe little to no capital gains taxes.

We all want to give our children the best future possible, so before making any big decisions, make sure to consult a trustworthy estate planning or probate attorney to setup the best path for your child’s future.

Tags: gift, home taxes, home title, legal rights, litigation, parent/child exclusion, Probate, tax, tax burden, title, transfer, trust, trust of survivorship
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