A client recently asked about leaving property to his only child and wanted to know if he could add his child on title to his home rather than using a trust. The client wanted to use joint tenancy to avoid probate and smooth transition between parent and child. While my client was correct about avoiding probate and the smoother transition, I advised him not to put his child on the title. Why?
First, even though my client’s intent was only for a smooth transition after his death, adding his child on title means they own 50% right now, not just after death. Second, if the child has debts, is involved in a lawsuit, or is trying to apply for any needs-based programs such as Medi-Cal, the house (or the child’s 50%) is considered an asset of the child, even if my client has paid every dime into the house on his own.
Second, if there is a mortgage on the home, or if my client needs to get a mortgage or a reverse mortgage, the child now has to consider whether or not they want to be involved in a mortgage, or can they even be involved in a reverse mortgage? Can they qualify? Most mortgage companies require that the deed to the home match the names of the individuals applying for the mortgage. Adding a child onto the title of the home can quickly complicate mortgage scenarios for the home.
Third, putting a child on title to your home now can eliminate tax benefits. If my client puts his home in a revocable trust, and after he dies, the trust gives the home to his child, the child receives the home with an income tax basis equal to the value the home is appraised at on the date of my client’s death; which is important for capital gains tax purposes. For example, if my client purchased his California home for $100,000 thirty years ago and is now worth $1 million, that is a lot of gain. My client’s tax basis is $100,000, and his gain is $900,000. If my client sold the house while he was alive, he would have to pay capital gains taxes on his gain or profit. If my client dies and leaves the house to his child via a trust, the child inherits it with a tax basis of $1,000,000, the property’s value on my client’s date of death. That is called a step-up in basis. The child inherits the property with a new fair market value basis rather than the parent’s original basis, thus eliminating or severely reducing capital gains taxes.
However, if my client puts his child on title to the house now, while he is still alive, the child only receives a step-up in basis on my client’s 50% of the house. This means that there will still be capital gains because the gift from my client to his child of 50% of the house will still have the original tax basis and will not receive any step-up in basis.
While there may be some scenarios where adding a child onto the deed to your home may be beneficial or needed, the consensus is that it is much more helpful to inherit when a parent dies than receiving a gift while they are alive. In addition, adding a child to your home can cause unintended negative consequences for the parent. Therefore, it would be prudent to speak with your estate planning attorney or real estate attorney to discuss all options before signing any deeds. Any mistakes or inadvertent issues that come up with real estate transfer are much more expensive to fix than the cost of planning ahead.