You may have heard that you can avoid Probate by putting your home in your adult child’s name; or perhaps your son or daughter is helping to pay your bills and you think it would be easier to manage finances if your property was in their name. If you are considering adding your adult child’s name to the deed of your home or transferring ownership of your home to your child, consider the following reasons why you should not do so:
When you put your home in your adult child’s name, you can no longer sell the property without his/her consent. Furthermore, in the unfortunate event that your child were to pass, the property—or at least their interest in the property—could be inherited according to their Will, or lack thereof, depending on how the property is titled.
Your home may be exposed to your adult child’s creditors, if he/she has unpaid debt, or is subject to a tax lien in the event that your child is overdue on state or federal taxes. Even if your adult child does not already have debt, he/she may be able to use the property as collateral to secure future loans. You will have no protection from their creditors.
According to Medicaid regulations, if your transfer is viewed as an attempt to move assets and become eligible for Medicaid funds to pay for long-term care, your “gift” may trigger a period of ineligibility for Medicaid benefits. When you apply for Medicaid, you will have to disclose all financial transactions during a certain period of time. If you have to move into a nursing home and you recently made a transfer, the period of ineligibility will be calculated using a formula that divides the value of the transfer by the average cost of a nursing home in your state.
The transfer to your adult child will legally be considered a gift and subject to federal gift tax regulations. Under the new tax plan that came into effect in 2018, this will likely only impact families with very large estates, but it is something to consider in your estate planning strategy.
For federal income tax purposes, if you simply add your child’s name to the title, he/she receives the gift at your cost basis. For example, if you paid $100,000 for the property and it is now worth $500,000, and you give your daughter half of the house, her cost basis would be $50,000. When she goes to sell the property, she would be entitled to the $250,000 and, if he/she isn’t living in the property when it is sold, he/she might have significant capital gains taxes to pay.
Overall, the decision to transfer the deed of your home to your adult child can create several problematic circumstances and, in most cases, should not be done for reasons of convenience or as a tool to avoid probate. Speak with an attorney and allow them to guide you.