Putting your child’s name on the deed to your home is often seen as a simple and inexpensive way to ensure your son or daughter receives your home when you pass. But as you will see below, putting your child on your deed can actually cost you much more than you think.

1. Title Issues

Adding a child’s name to a deed gives him or her an ownership interest in your home. As a result, you cannot sell the home or refinance your mortgage without your child’s permission. Technically speaking, your child could even sell his or her share of the property without your consent.

2. Creditor Claims

If your son or daughter is on the title to your home, then their share of your home may be subject to his or her creditor claims. This includes claims from credit card companies, lending companies, or liability claims stemming from an accident. Your home could also be at risk if your son or daughter is required to pay criminal restitution.

3. Divorce Claim

If your child goes through a divorce, the court is required to divide the parties’ property equitably. If your son or daughter is on your deed, then your home is technically your child’s property and subject to division by the court. Meaning your child’s former spouse may be entitled to a share of your home. Most of us think this will never happen to our children, but divorce rates are as high as 50%.  Adding your son or daughter to your deed is not worth the risk.

4. Bankruptcy Claims

Nearly a million people file for bankruptcy each year. If your child files bankruptcy, the bankruptcy court may be entitled his or her share of your home. Remember, by placing their name on your home you are gifting them a share of the property. As a result, your child’s share of your home may be sold to satisfy his or her debts.

5. Income Tax Problems & Step Up in Basis

This one is a bit more complicated but also very important. You must first understand capital gains tax. A capital gain is the difference between your basis (purchase price) and the amount you get when you sell an asset (sale price). For example, if you purchased a home for $100,000 and sold he same house a few years later for $500,000 you would have to pay tax on your gain of $400,000 –with some exceptions.

If you add your child to title of your home while living, he or she receives your basis (purchase price) in the home. If your child sells the house after your death, he or she will likely incur a capital gain tax for the difference between your purchase price, and the sales price. See Example 1.

Example 1: Say you bought your home in 1980 for $100,000. In 2010, you add your child to the deed of the home when the home is worth $500,000. When you added your child on to your deed, you technically made a gift of one-half the value of the property ($250,000). Your child also receives one-half of your cost basis ($50,000). Thus, if you were to die and your child sells the home for $500,000, then your child would be liable for a capital gain tax on his or her $200,000 profit.

Sale Price …………………… $250,000
Purchase Price (Basis) ….. $50,000
Gain ……………………………$200,000

The current capital gain rate is 15% for most people but can be as high as 20%. Meaning, your child may have a tax bill of $30,000 to $40,000 on the sale of their one-half share of the home.

Conversely, your one-half share of the home is likely not subject to capital gains tax because your children will receive a step up in tax basis upon your death. Meaning, their cost basis (purchase price) for your half of the home worth $250,000 is stepped up from the original purchase price of $50,000 to $250,000, thereby eliminating the capital gain on the sale of your share of the home.

Sale Price …………………… $250,000
Purchase Price (Basis) …. $250,000
Gain ………………………………….$0.00

As illustrated above, your child is liable for a capital gain of $30,000 to $40,000 for the share you transferred to them. There is likely no tax on the share they receive from you after you pass. So why not transfer the entire home to your child when you pass? What if instead of adding your child’s name to your deed, you used a revocable trust or lady-bird deed? See Example 2 below.

Example 2: Say you bought your home in 1980 for $100,000. In 2010, you created a trust which gives your home to your child upon your death. Because the house passes upon your death your child receives a step-up in tax basis on the entire value of the home. Meaning, if he or she sells the home after your death their cost basis (purchase price) is stepped up from the original purchase price $100,000 to $500,000 (the value of the home at your death), thereby eliminating the capital gain on the sale of your share of the home.

Sale Price …………………… $500,000
Purchase Price (Basis) …. $500,000
Gain ………………………………….$0.00

By not putting your son or daughter on your deed they can take advantage of a full step up in cost basis and save $30,000 to $40,000 in capital gains tax. They cannot receive this savings if you put them on your deed while living. Additionally, using a trust or other device to pass your home to our heirs is just as easy as putting their name on the deed, without the risks outlined above. If you want to learn more, here are 8 Reasons a Living Trust Can Be the Most Important Document in Your Estate Plan

Michigan Trust Lawyer

Putting your son or daughter on the deed to your home can cost much more than you think. You could even lose your home. This is why you need an estate plan. There is no substitute for good estate planning. An experienced estate planning attorney can ensure your wishes are honored without the costs and risks outline above. If you are ready to start an estate plan, here is how!

Plymouth Law Firm

Our Michigan Lawyer serves Detroit, Ann Arbor, including Plymouth, Livonia, Northville, Novi, Canton, and Farmington Hills. Contact us today! We offer free consultations. Call today (248) 773-5555

About the Author: Aaron R. Shahan is an attorney at Atlas Law, PLC. You can find him on Google+  Aaron dedicates his practice to virtually all aspects of estate planning, elder law and probate.