One common way to avoid probate is to hold property jointly with children (or other beneficiaries) with rights of survivorship. This means that when you die, the children will inherit the property automatically and without the need for probate. But adding your children to the deed for your home in order to avoid probate may not be such a good idea. Here's why:
- Gift Tax Problems. Any time you give your child something of value that exceeds $14,000 (formerly $13,000) during the course of the year, you have made a taxable gift to your child. This includes adding your child's name to your deed - if your child does not pay you anything to be added to the deed, then you have made a taxable gift. As a result, you will need to file a federal gift tax return on IRS Form 709 in order to report the taxable gift to the IRS. And while there is a lifetime gift tax exemption that will allow you to avoid owing any gift taxes on the transfer, when you die you will be able to leave less to your children free from estate taxes.
- Documentary stamp taxes. If you add one child's name to the deed for your Florida home and there is a mortgage on it, then documentary stamp taxes (which is a type of real estate transfer tax) will be owed on 50% of the balance of the mortgage. This cannot be avoided in Florida by using a "quitclaim deed" and can add up to thousands of dollars. Other states may also collect real estate transfer taxes when a child is added to a deed.
- Title complications. Once you add your child's name to the deed for your home, you cannot sell it, refinance the mortgage or take out a new mortgage without your child's consent. In addition, your child could sell his or her interest in the property to a third party without your consent.
- Loss of homestead exemption. Some Florida counties take the position that all owners of a residence that receives the homestead exemption for real estate tax purposes must live at the residence. Therefore, if you add your child's name to the deed for your Florida homestead and the child does not live with you, then you could lose a portion or all of your Florida homestead exemption for real estate tax purposes. This may also be the case in other states.
- Creditor and divorce issues. If your child ends up with a tax lien, creditor problems or in divorce court, then the government, creditor or ex-spouse may place a lien on your property and attempt to force a sale.
- Delay in Medicaid eligibility. As mentioned above, by adding your child's name to the deed for your home, you have made a taxable gift for gift tax purposes, and you have also made a transfer that will delay your eligibility for Medicaid if you apply for assistance within five years after making the gift.
- Income tax problems due to no step up in basis. When you die and your children inherit your home through probate, a revocable living trust or a transfer on death deed, then your children will receive a step up in the income tax basis of the home. This, in turn, will minimize capital gains taxes on the sale of the home after your death. On the other hand, when you add your child's name to the deed for your home during your lifetime, then the home will not receive a step up in basis after your death which means that your child will owe capital gains taxes when the house is later sold.
What Should You Do?
As you can see, adding your child's name to the deed for you home is tricky business. Before proceeding, please consult with an experienced estate planning attorney to weigh the pros and cons in your particular situation.
If you do decide to go ahead and add your child to your deed, then be sure to work with an estate planning attorney or real estate attorney to write and record the new deed since state laws are very specific about how a deed must be worded to create rights of survivorship among the names listed on the deed. One wrong word or one missing word can lead to probate of the property, which is exactly what you were trying to avoid in the first place.