Should We Name Our Adult Child on the Deed, So Probate and Title Transfer Aren’t Needed Later?

Would it make it easy on you and your adult child to put the child’s name on the deed to the home you’re buying? Especially if you’re an older adult, it might seem to make perfect sense.

But the answer isn’t as easy as it might seem at first glance. So, read on. You might just decide that everyone’s interests could be better served if you simply put your own names on the deed.

Control Over Your Asset Matters

First, a threshold question. Do you plan to buy using financing? If so, then everyone named on the deed will own a real estate asset — which is also the lender’s collateral. Ask your mortgage consultant if all title holders are expected to take responsibility for the property’s debt.

Lenders generally don’t like to allow for extra complications in case of default. Your child may need to be vetted as a mortgage holder along with you.

And that brings us to the topic of credit profiles. If you name your adult child on your new deed, then your child’s whole credit picture becomes linked to your home property.

Your adult child could face relationship changes, financial challenges, even court actions that could position third parties to acquire a claim on your property. In a worst-case scenario, you could wind up arguing in court that your home should be separate from your child’s activities. If the court disagrees, you could lose your property.

Even in the best of scenarios, you’ll need your child to sign off if you ever want to use your home for income or borrow against your home equity. And when determining your creditworthiness for a home equity loan, the mortgage lender will be examining your child’s credit profile as well as yours.

In short, you aren’t just planning to avoid probate later by putting your child’s name on the deed. You’re mixing your financial affairs with those of your child. That might go well. Or it might backfire spectacularly. Because life is full of surprises.

Indeed, unforeseen occurrences can upset a loving parent’s best-laid plans. Who among us knows that we’ll even outlive our grown children? If your adult child were to pass away before you do, your child’s heirs could become owners of the property, depending on how the deed is vested.

Time to transfer a deed? We keep our deed forms continually updated, in full compliance with state and county standards.

Potential Tax and Benefits Impacts

If your adult child becomes a co-owner, then your child is, for tax purposes, acquiring (through a joint vesting of the deed) a share of the property at the price you’re paying for it. After parents pass away, what if the child who’s on the deed wants to sell? They will be responsible for capital gains. Capital gains taxes are added up based on the rise in property value from the time they vested.

Gains on inherited property, in contrast, are only taxed from the date of the inheritance, not all the way back to when the home was acquired.

Also speaking of taxes, adding your child’s name to a deed for free is a taxable gift, and must be reported as such when you file your returns for the year. This may or may not matter to you, but it will impact your lifetime tax exclusion allowance for gifts. (More on gift taxes and exclusions appears on the IRS website.) And the gift will also come to the attention of Medicaid if you need to qualify for assistance within the next five years.

Given that timing and your personal finances come into the above calculations, this is a complex and case-specific decision to make. An estate planning expert can guide you in putting together your optimal estate plan.  

You don’t need a lawyer to create a deed. Yet a lawyer in the state where the property is located can check your documents to be sure you’re not missing anything you need to know, given your personal situation.

What Are Your Alternatives?

You’ve got choices. There are a number of ways to enable your adult child to receive your property in the future. You might consider: 

• Writing a will. A Last Will is essential for distributing what you own — including, if you wish, your home. A will is simple. It does not need to be recorded. Yet it can transfer a home with the power of a deed from the local county probate court. And that valuable tax break on capital gains? A Last Will is a good way to pass that advantage to your adult child.
• Recording a transfer on death form. Some states offer a transfer on death form for real estate. If adopted by your state, this is a straightforward method for passing on a home. After you sign and record this document with your home’s county, you know your home will pass to the named beneficiary when the time comes. Two big advantages? This instrument is revokable; and you’re helping your child avoid probate upon your death — as long as the home isn’t needed to pay off your debts.
• Forming a life estate. A life estate deed might be a good option if you intend to stay in your home for life, then pass legal ownership to your adult child. Although your home would stay in your taxable estate, the life estate means no probate is necessary for the home. Your adult child will just file the death certificate and life estate deed with the county, and receive full ownership.
• Starting a revocable trust. This is a little more complicated. But an estates and trusts lawyer can guide you as you quitclaim your home into a living trust. The beneficiary avoids going into probate court to receive the home. During life, you’re in control of the real estate asset.

These are all methods of passing along your home without missing key tax advantages.

All (Well, Most) Things Considered…

If you expect to pass your home along to your child after your lifetime, it’s usually best to let the child inherit when you pass, rather than make the home into a present gift. The reasons offered above represent general information, not legal or financial advice.