Several times a week clients ask me whether they should add an adult child to the deed on their home. Often, a friend or family member has recommended this practice in an effort to avoid the “dreaded” probate process and make things “easier” at death. With the exception of adding a spouse to a deed, my answer is usually the same when presented with this question – NO. The risks almost always outweigh the benefits. Here are four risks associated with adding a non-spouse to your real estate deed.
1. Your property can become vulnerable in a lawsuit or judgment against the child you added.
When someone gets sued or defaults on a loan, that person’s assets are vulnerable to satisfy the judgment resulting from the lawsuit or default. If your child finds themself on the wrong side of a judgment, and you have put that child’s name on your deed, your home can be considered that child’s asset in the ensuing legal proceeding. This can result in a lien being placed on your home (and potentially result in a foreclosure) and the collection of the judgment when your property is sold.
2. You could disqualify yourself from public benefits like Medicaid.
Needs-based public benefits programs like Medicaid have very specific requirements for qualification. The qualification determination includes a thorough analysis of your assets, your income, and any gifting of your assets that has taken place within a certain time period prior to filing the application. Adding a child to the deed on your home is considered a gift and routinely results in disqualification from needs-based public benefits like Medicaid.
3. Your child could end up with a hefty tax bill when they sell the property after your death.
Capital gains taxes are complicated. Adding a child as an owner of your property while you are still alive can create an even more complicated and expensive capital gains tax situation for your child when you die. In most cases, if the ultimate goal is for your child to receive your property at your death, it is better to let them inherit it at death rather than to gift it to them during your life.
4. You could lose control of your own property.
If you add another person to your property deed, that person becomes an owner and gets a say in what happens to it. If you decide to sell the property, that person has to agree, and they are technically entitled to a portion of the sale’s proceeds. Also, if you change your mind and decide you do not want that person to receive your property at death, they have to consent to being removed from the deed. Finally, if the person dies while you are still alive, a portion of your property could pass to their spouse or the beneficiaries under their Will.
If you would like to avoid the time and expense of probate at your death, talk to an experienced estate planning attorney about legally advisable methods to avoid it. Trusts are a great tool to use to avoid probate, or in states like Colorado, a Beneficiary Deed (similar to a Transfer on Death Deed) can be another viable option. If you find yourself drafting a Quitclaim deed or other transfer deed on your own, stop and speak with an Attorney or CPA first. You could be making a very costly mistake.
