Should you add a child’s name to your property title? Pros and cons of adding a child as co-owner to avoid going through probate to inherit property.
Q: I just read your column giving suggestions to an elderly mother who wanted to make sure her daughter received her home at death without probate. I’m a retired attorney, and I don’t know how many times I was asked the same question by clients over the years.
There’s one thing that you didn’t mention that often was the deal killer for the parent when considering putting the child on the title as a co-owner. The child’s undivided one-half interest is an asset in the child’s estate subject to claims by creditors, and the parent is possibly exposed to a creditor of the child becoming the co-owner and forcing a sale.
When it came down to a choice between the possibility of losing the house on account of an unforeseen financial difficulty of the child and having the child wait for the money while a short probate procedure was completed, the parent usually chose the latter.
How to Leave Property to a Child
A: Thanks for your comment on one of many questions we’ve also been asked over the years about how to leave property to a child. Like you, we’ve found that the top way parents hope to accomplish this goal is by simply adding the adult (and in some cases, minor) child to the title via quitclaim deed.
In past columns, we’ve mentioned that conveying title to a child while the parent was still alive could have adverse tax consequences. In those columns, we’ve mentioned that the children may find that they have to pay more federal income taxes when their parents die than if they had inherited the home by will or through a trust.
In the most common example, a parent may own a home that has appreciated in value over the years. Upon the death of that parent, and the sale of the home shortly after the death of the parent, the child would inherit the home at a stepped-up basis. This means that for purposes of selling the home, the value of the home to the child is the selling price even if the parent purchased the home at a fraction of the price years ago.
In this example, the parent would pay not federal income taxes when the home passes to the child and the child pays no federal income taxes on the sale of the home.
Should You Add a Child’s Name to Your Property Title?
Your excellent point adds to the conversation that many children have their own financial issues that can inadvertently wind up pulling parents down a financially dangerous path – when in fact these are issues they could avoid with a little forethought and planning.
Children may have student loan debts, credit card debt, medical debt or other liabilities that could cause creditors to go after those children. If the parent owns the home in the parent’s name, the parent doesn’t have to worry about those creditors during the parent’s lifetime. Once the parent dies, it’s a different story. The creditors can go after the home if the child has inherited the home or gets money from the sale of the home.
But, if the parent adds the child to the title of their home, that, as you correctly point out, could open up the door to creditors and years of hassle the parents would otherwise avoid.
We won’t go into the issues of trying to protect the child’s assets after the death of the parent in this column, but suffice it to say you’ve given us yet another reason why parents should not add their children to the title of their home. If possible, the parent can have a will drafted naming the child as the heir. The parent can also set up a living trust that would allow the home to pass on to their heir(s) and avoid probate court and potential creditors in one fell swoop. For more expensive or expansive properties, other trusts may be more useful. A good estate attorney can provide context and guidance.
Good planning can go a long way to avoid a headache down the line. Thanks for your comment.