Many parents consider adding an adult child to the deed to their home. It sounds simple: If the child is already on title, transferring the house later should be easier and perhaps probate can be avoided.
But adding a child to a deed during your lifetime can create consequences very different from allowing that child to inherit the property after your death.
When you add your child as a co-owner, you are not simply naming the person who will receive the house someday. You are generally giving your child a present ownership interest in the property. That distinction matters. Depending on how title is held, selling or refinancing the home may require your child’s cooperation. Your child’s ownership interest may also potentially be affected by events in your child’s life, including creditors, lawsuits, bankruptcy or divorce.
One of the most overlooked consequences involves income taxes. When you give property to a child during your lifetime, the child generally receives your existing adjusted tax basis in the portion gifted. This is commonly called a “carryover basis.”
Suppose you purchased your home many years ago for $100,000 and it is now worth $400,000. If you give the property to your child during your lifetime, your child may receive your approximately $100,000 basis. If the property is later sold for $400,000, there could potentially be approximately $300,000 of taxable gain, subject to applicable exclusions, adjustments and other tax rules.
Generally, property inherited at death receives an adjusted income-tax basis based on its fair market value at the owner’s death.
Using the same example, if your child inherits the home when it is worth $400,000, the child’s basis may be adjusted to approximately $400,000. If the property is sold shortly afterward for approximately that amount, there may be little or no capital gain.
Parents sometimes add a child to title primarily because they want to avoid probate. But there are other estate-planning options.
For many California homeowners, a properly prepared and funded revocable living trust can allow a home to pass without probate while allowing the parents to maintain control during their lifetimes. The successor trustee can later administer or distribute the property according to the trust instructions.
California homeowners must also consider property-tax reassessment under Proposition 19. The rules for parent-to-child transfers are now much narrower. Whether an exclusion from reassessment is available depends on specific requirements, including, in many cases, whether the property was the parent’s principal residence and becomes the child’s principal residence.
Changing a deed may look like an easy solution, but it should be considered as part of the entire estate plan. Control, capital-gains taxes, property-tax reassessment, creditor exposure, family circumstances and your ultimate wishes should all be considered before transferring an ownership interest.
Before putting your child’s name on your deed, find out what that seemingly simple change actually means. Sometimes the easiest solution today can create unnecessary complications tomorrow.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues.This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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