Adding Adult Child To Your Home Title Can Cause Problems

Patricia Davis, a Maryland-based financial coach, says that every time she gives a lecture on money, someone always asks this question: Is it a good idea to add an adult child to the title of my home?

Davis, a former banker who worked with high-net-worth individuals, gives the same answer every time: “No.”

There are a number of reasons why someone might want to add an adult child to his or her property. Often elderly parents are trying to make sure that after they die, their home passes on to their children without having to go through probate, the legal process in which the court supervises the distribution of assets according to a will or as dictated by state law.

Others are trying to do what they could better accomplish in a will or living trust.

For example, Davis told me a story of one woman who added her sister’s name to her home. Upon this woman’s death, the sister was supposed to sell the house and divide all the proceeds among her four adult nieces and nephews. Well, the aunt did put the house up for sale – even before her sister’s funeral – but she kept the money for herself.

Just so you know, here are the various ways property can be owned:

• Joint Tenancy. This is property owned by two or more people at the same time. Joint tenancy with the right of survivorship means that if one owner dies, the other assumes complete ownership of the property.
• Tenants in Common. Two or more persons own property but without the right of survivorship. Instead, upon the death of one co-owner, his or her interest passes to whoever is named in that person’s will. If there is no will, state law will dictate which heir or heirs get that person’s share in the property.
• Community Property. This is a special form of joint tenancy between husband and wife. Each spouse owns one-half of the property bought during the marriage. Either spouse can then will their share of the property to anyone they want.
• Tenancy in the Entirety. About half of the states recognize this special ownership right available to married people. Each spouse owns half of the property. Neither spouse can sell the property or transfer their ownership without the consent of the other. If one spouse dies, the other is entitled to the whole property.

Many people asking the question of whether it makes sense to add someone to their home are considering joint tenancy because of its right of survivorship, which avoids probate.

John C. Grier, managing partner at the San Diego law firm of Mathews Grier Damasco, outlined for me in an interview and in a really good article on his firm’s Web site (www.mbglawoffices.com; click on the link for trusts and estate planning) the pitfalls of placing property in joint tenancy. Of course, you should check with your own legal or tax adviser regarding your particular situation, since the laws of each state may differ, Grier said.

So, what are the pitfalls of joint tenancy?

• You could trigger a gift tax for yourself or your estate. The federal government assesses taxes (or a reduction in the available estate tax exemption) against any gift over $11,000 made to any one person in a calendar year, Grier said. If you add someone to your property, it may be viewed as a gift of one-half the value of the property.
• You may unintentionally create a taxable profit for your heir. A transfer of real property on death receives a stepped-up value to current market value, for capital gains purposes, Grier said. Simply put, suppose a couple bought their home for $20,000 in 1955. The home is now worth $300,000. An adult daughter inheriting the property after the couple’s death receives the home with a fair market value of $300,000. If it is immediately sold, there is no tax because there has been no gain, Grier said. But if the daughter’s name is put on the home, she doesn’t get the full stepped-up value.
• Property held jointly is subject to claims by creditors of any of the owners. For example, suppose a couple adds their son’s name to their home. The son has a business that fails and the IRS comes after him for unpaid taxes. Because the son is part owner of his parents’ home, the IRS tries to force the sale of the house. The couple will get a share of the proceeds but they would no longer have their home to live in.

Sadly, the above example is a true story. Fortunately, the couple was able to keep their house but not before spending $2,500 in legal fees as well as paying the son’s tax obligation of $75,000, Grier said.

Keep this in mind. Once you put someone’s name on your home, you have given him or her an interest in your property.

“Horror stories abound,” Davis said. “You have to be very careful about adding another individual’s name to your home.”

By Michelle Singletary