For centuries, people have added their children to the titles of their real estate before their deaths in order to avoid probate and pass their real estate to their children after their deaths. Does this remain a wise choice?
It can be. It will accomplish the goal of passing the real estate at your death.
However, there are significant drawbacks that you should consider.
a) Your children will have the same rights to manage the property as you do. In other words, if you decide that you want to sell or refinance your property, your children will have to sign the necessary documents permitting you to do so. If your children will follow your recommendations and cooperate, this may not be a problem. If one of them does not cooperate, you may have to go to court to get permission from a judge to override the objections of the child.
b) Do not add minor children to the title. If you need to sell or refinance, then a judge’s order will be required since minors cannot sign contracts. You will have to demonstrate to the judge that it’s in your children’s best interests to sell or refinance the property. It’s difficult to find a purchaser for a home when a judge first has to approve the sale.
c) If there is an insurance claim against the property, the check will be made out in all the title owners’ names. You may have to negotiate with your children about how to spend the insurance proceeds.
d) When you add the children to the title, you are making a gift of a share of the property. For example, if you add the children to the title of a home that has equity of $100,000, and you and your spouse add two children to the title, you may have made a gift of $25,000 each. That exceeds the current federal tax gift tax annual exemption of $14,000. You should file a gift tax return declaring the gift. Failure to file carries penalties.
e) Being owners of real estate could impact your children’s ability to qualify for financial aid.
f) Assume your children take title pursuant to the deed after your death, but decide to sell the property. Their basis in the property will be your basis in the property. This means if you bought the property for $150,000 and added $25,000 in improvements, your basis would be $175,000. The value of the property at the time of your death is $350,000. If they sell soon after your death, they will have a gain (profit) of $175,000 on which they will have to pay taxes. If they had inherited the property after your death, their basis would have been the value of the property at your death, $350,000. There would have been no gain and no tax on the sale of the property. In contrast, if you (or you and your spouse) had sold the property before your deaths, assuming you had been living in the home, $250,000 of profit or gain ($500,000 for a couple) would have been forgiven.
g) If one of the children is divorced, the property could become part of the claim made by that child’s spouse.
These examples show that before you add your children to the title of your property, you should confer with a professional. Before you do that, carefully consider the potential impact that adding the children to the title can have. Given the generous estate tax credit, it may not make sense add the children before your death.