How Adding Adult Child to Your Home Title Can Cause Problems

Putting your child on the deed may feel like smart planning, but it can lead to unexpected financial and legal headaches.

Many parents are simply looking for a straightforward way to ensure their child inherits the home or to avoid probate delays. Others hope that adding a child to the title will prevent future conflicts over money or property.

But changing your home’s title can create tax complications, expose your property to your child’s financial risks and even limit your own control over the home.

Before making any decisions, it is important to understand how property ownership works, what legal and financial consequences come with joint ownership and what alternatives may offer better protection for both you and your child.

Ways Property Can Be Owned

Before you make a change to your home’s title, it’s helpful to understand the ways you can own property. Each type of ownership has specific legal implications, tax consequences and rights that can affect you now and later and affect beneficiaries.

Let’s look at a few joint-ownership legal relationships.

Joint Tenancy

Joint tenancy is one typical form of property co-ownership. A right of survivorship highlights this agreement. When one joint tenant passes away, that person’s ownership stake in the property automatically passes to the surviving joint tenants.

This automatic transfer of interest allows a property to bypass probate, making it attractive to parents who want to pass their home directly to their children.

However, a valid joint tenancy agreement requires what is known as “four unities.” That is, all the joint tenants must gain their stake in the property at the same time, with equal shares, equal property rights and on the same deed or agreement.

Tenants in Common

Tenants in common means that two or more people own a property, but none of them enjoy 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.

Also, any of the co-owners can re-mortgage, sell or transfer their ownership stake. This aspect of the agreement makes for easier estate planning but can cause complications with co-owners and those who inherit the property.

Community Property

Community property defines any property that spouses acquire during their marriage. In these cases, spouses share ownership of the property 50% each, and they both must agree to add anyone to their home’s title, including children.

However, only nine states are community property states. The other 41 states are considered common law states.

Community property ownership can become complex if the couple puts an adult child on their home’s title. A transfer can trigger gift tax issues if the home’s value is too high. Also, if there is a right of survivorship clause in the agreement and one spouse dies before the other, there may be complications in the transfer of the deceased’s share of the home.

Finally, note that community property laws deal with spousal protections. Adult children do not come into play here.

Tenancy by the Entirety

Tenancy by the entirety is a legal concept that allows married couples to own property and for each spouse to be treated by the law as a single owner. That is, the law does not treat the property as being owned 50/50.

When one spouse dies, the other spouse automatically inherits the property outright.

Adding an adult child to a home’s title weakens this type of ownership, which carries strong asset protection benefits, particularly in states with beneficial homestead exemptions.

You May Become Vulnerable to Creditors

One of the biggest risks of adding an adult child to your home’s title is that it exposes you to your child’s financial issues. By adding your child as a co-owner, your home becomes an asset that your child’s creditors can access for payment. You could wake up one day and discover that a bank or other creditor has put a lien on your house.

If your adult child gets divorced, is a party in a lawsuit, owes money to the IRS or develops a serious personal debt problem, those matters may complicate the ownership structure of the home. In some cases, these disputes could force you to sell your home to pay for your child’s financial obligations.

One example is if your child is involved in a car accident but is underinsured and can’t pay a large judgment from an accident-related lawsuit. Your home may be the best asset from which to get money.

Adding your adult child to the title of your home makes you vulnerable to your child’s financial mistakes. Your home is an asset. Creditors can lay claim to your property because your in-debt child has a share of the title.

You could wake up one day and discover you have a lien on your property, which can handcuff any plans you have for selling the property, refinancing the mortgage or taking out an equity loan.

In drastic situations, your child’s debts could force you both to sell the property to cover those debts.

Cost Basis Can Be Considered

There can also be tax implications from adding a child to your deed. It can expose your child to capital gains taxes. This assumes that your home is worth more when you die than when you bought it.

Your purchase price is known as the cost basis. The difference between that cost basis and the home’s (appraised) value when you die is called capital gains, and capital gains are taxable.

By adding a child to the title of your house, the child inherits your original cost basis and any capital gains.

However, if your child inherits your home upon your death, the cost basis is “stepped up” to the property’s value at the time of your death, potentially reducing capital gains tax if they sell.

You Could Lose Control Over the Property

Another downside of adding someone else to the title of your home — even your adult child — is that you lose full control of the property.

You won’t be able to make outright decisions about your home. In fact, you’ll need the other person’s agreement (and signature) to take any legal steps with the property, including selling it, and refinancing it.

Changes in Financial Aid Eligibility

One potential downside for your children if you add them to the title of your home (or any of your property) is that it counts as an asset they must list when going through the financial aid process for college, grad school, law school, medical school or another higher-education degree program.

Any money in a child’s name counts as assets for the child. The more assets your children have a share of, the less money they may be able to receive in financial aid. That can mean they have to pay much more upfront for that degree. Or it can mean that when you save for college, you have to put more away.

You could also have to pay more to make up for the difference in the money they couldn’t borrow.

Potential Family Conflict

The number of ways in which adding a child to the title of your home can cause a conflict are . . . many.

Potential Setups for Family Conflict Include:

• Adding one child and not another — or others
• Adding a child (or children) but not a stepchild (or stepchildren)
• Adding multiple children who don’t normally get along
• Adding multiple children who usually are agreeable but can’t agree on what to do with the home when you die

Even though there are valid personal financial reasons not to put an adult child on a property title, these scenarios are emotional reasons to follow the same advice.

Is Joint Tenancy the Way to Go?

The automatic transfer of ownership and the ability to avoid probate make joint tenancy an enticing option for parents who want to add an adult child or children to the title of their home.

But it should come only after careful consideration. For instance, the automatic transfer of this type of ownership works both ways. If your child dies before you, his or her ownership stake transfers back to you. That transfer could be complicated by your child’s divorce, personal debts (such as unpaid private student loans) or legal issues.

There are also tax implications to consider.

Before you make any decision about joint tenancy related to your estate planning, check with your attorney or tax adviser about your particular situation as the probate laws that govern these cases differ by state.

What are the Pitfalls of Joint Tenancy?

Joint tenancy can create far more challenges than people expect. One issue is how life changes can disrupt the arrangement. When a joint owner goes through a separation or divorce, for example, one person may want to keep the property while the other wants to sell. Because both owners must agree before anything can happen, even simple decisions can turn into long standoffs.

There are also tax consequences to consider. When someone inherits property through a will or trust, the home usually receives a stepped-up cost basis, which can eliminate capital gains if the property is sold right away. Joint tenancy works differently. A surviving co-owner does not receive that same tax benefit and may owe capital gains taxes if they sell the property later.

Family disputes can add another layer of complications. If a surviving spouse forgets to update their will after inheriting a home through joint tenancy, the property might unintentionally pass to biological children only, leaving stepchildren with no claim. Missing or outdated paperwork is another common problem and can leave courts unsure of the original owner’s intent.

Joint tenancy can also trigger gift tax issues. Adding someone to the title may be treated as giving away a portion of the home’s value, which could count against the federal gift tax limit for that year.

These tax issues also affect heirs. If a parent adds an adult child to the title during their lifetime, that child may lose the full stepped-up basis they would have received by inheriting the property outright. This can result in a much larger taxable gain if the home is sold later.

Finally, joint tenancy opens the door to creditor problems. Because each owner has a legal interest in the property, a child’s debts – such as unpaid taxes or liabilities from a failed business – can put the entire home at risk. Creditors may attempt to place liens on the property or even force a sale to recover what they are owed, jeopardizing the original owners’ ability to remain in their home.

Could this Joint Tenancy Horror Story Happen to Me?

Keep this in mind. Once you put someone’s name on your home, you have given that person an ownership interest in your property.

Divorces, business problems, unexpected debts, and adverse legal judgments can all affect your assets if someone else is tied to them. And anytime you’re putting your faith in another person, that person’s character can test your faith.

Alternatives to Adding My Child to My Home Deed

Putting your child’s name on the title to your home isn’t the only way to achieve your goal. Alternatives include creating a revocable trust, creating an irrevocable trust, executing a transfer-on-death deed and updating your last will and testament. These alternatives in many cases are better than deeding property to children.

Revocable Trust

A revocable trust, also known as a revocable living trust, is a legal instrument that allows your assets to bypass the probate process after you die. It is one of the most flexible ways to add a child to the title of your home, and you retain control of the home.

This kind of trust can be permanent if you choose, but you can also adjust it — and end it — at any point before you die. You can also use a trust to manage your assets if you become incapacitated.

When you create a revocable trust, you can name yourself the entity’s trustee, giving you full control over the assets in the trust, or you can also name one or more people as decision-making trustees.

A revocable trust is one option to ensure that your adult child inherits your home when you pass away while also protecting the property from your child’s creditors while you’re still alive. The advantage of inheriting property, money or other assets from a trust is that you avoid probate, and ownership can transfer almost immediately.

However, inheriting a home from a trust won’t help your child save money on future taxes.

Irrevocable Trust (Grantor Trust)

An irrevocable trust may be a better option for passing your property down to one of your children instead of adding a child to your home’s title.

This kind of trust is an estate-planning tool that allows someone to transfer financial assets out of their control, protecting those assets from creditors, nursing homes and others. In most states, assets placed in an irrevocable trust mean that they don’t count toward your net worth, which can help your situation if you are trying to qualify for net-worth-based government assistance, such as Medicaid.

The downside of this kind of trust is that once you set it up, you’re powerless to do anything about it. Any assets that you transferred to the trust will stay there until the terms of the trust kick in.

Transfer-on-Death Deed

A transfer-on-death deed is a legal document that you can execute before you pass away, and it allows your property to pass along to another person without going through probate. Twenty-five states permit transfer-on-death deeds for real estate.

You can revoke a transfer-on-death deed at any point before you die.

Because of the way it is structured, a transfer-on-death deed may be a better option for a parent who wants to ensure some or all of their real property passed directly to a child or another relative. It does not let the property in question become encumbered legally unless you are still paying a mortgage when you die or unless you have debts that may require the property to be sold to settle those debts.

If you no longer own the property attached to a transfer-on-death deed when you pass away, the deed carries no power.

A Will or Trust: Which is Better?

Wills and trusts are two legal vehicles that can distribute your personal estate to the people you want it to go to after you die. However, they differ in their function and in their tax status for recipients.

A will is a signed legal document that spells out who inherits your assets (or liabilities) following your death. Some states require that you have your will notarized for it to be valid. Other states don’t have that requirement.

When you die, a court in your state will probate your estate, being guided by the directions specified in your will. Be sure to check your state’s probate laws. In many cases, your executor can file for probate in any state jurisdiction. If the case gets filed in a more rural area of the state, probating your estate won’t take as long as it will in busier jurisdictions.

Although wills are the perfect document for distributing your possessions after you die, their primary downside is that they must go through probate.

A trust is a contract that also spells out who will receive your assets. The biggest difference between a will and a trust is that any assets that sit inside a trust do not have to go through probate. The people who inherit assets from a trust don’t have to wait for a judge to rule on its validity. Instead, trustees inherit whatever is in the trust.

You can set up a living trust or a testamentary trust. Both protect assets from creditors.

Wills and estate planning, such as creating a trust, let you pass your home from your ownership to your child’s ownership after you pass away.

Rather than signing your child’s name on the deed to your home, you can put your home into the trust for protection. You can also put your child in a will as a receiver of your home when you die.

How to Make Home Deed Transfer Easier for My Children

Adding your child’s name to your home’s title is only one way to pass along your house when you die (or before), but it may not be the best way. In fact, it rarely is.

A sound last will and testament, a trust (either revocable or irrevocable) and a transfer-on-death deed all have benefits that are stronger than a joint tenancy arrangement. These tools are all part of sound estate planning.

You should also realize that any major life changes that occur after you set up an estate plan should trigger a new look at your plan. Life happens: People die, families have disagreements, couples get divorced, and financial troubles come and go.

To decide what legal tool to use — or to use next — consult at least three professionals to help you understand all the options and their short- and long-term ramifications: A tax attorney or accountant, a real estate attorney and either a certified financial planner or an estate attorney.

These professionals will educate you about the most cost-effective and efficient ways to achieve your goals.