Rethinking Adding Your Child’s Name to Your House Deed

When it comes to safeguarding our assets and planning for the future, we often explore straightforward options for transferring property to our loved ones. Adding a child’s name to the house deed may seem like a convenient way to ensure your property goes to the right people, but it’s important to recognize the potential consequences. In this post, we will discuss the drawbacks of this approach and highlight alternative strategies for securing your home and protecting your family’s financial well-being.

Loss of Control

By adding your child’s name to the house deed, you grant them legal co-ownership of the property. Consequently, they gain decision-making powers concerning the property, including selling, refinancing, or obtaining a home equity line of credit. Additionally, if there is an existing mortgage, the lender will likely require consent for this partial ownership transfer. It’s crucial to consider the possibility of future disagreements over property management and maintenance, as well as the potential liability implications of adding a co-owner to your property.

Liability

When you add your child to the deed, you expose the property to their creditors and liabilities. Creditors may place a lien on your house if they obtain a judgment against your co-owner child. Moreover, the house could be subject to sale in the event of your child’s bankruptcy proceedings. Additionally, your property may be at risk in lawsuits involving your child, such as those resulting from motor vehicle accidents. Given these scenarios, it becomes evident that making your child a co-owner can compromise the security of your property.

Tax Implications

Transferring ownership to your child is considered a gift, and if the value exceeds $15,000, you will need to file a gift tax return for that year. Although you won’t owe any tax on the gift due to the lifetime exclusion amount, which currently stands at $12.92 million per individual ($25.84 million for married couples), it’s important to note that this amount counts towards the lifetime exclusion. The lifetime exclusion amount is already set to revert back to around $5 million in 2026, and Congressional legislation could always lower this exclusion further. 

Adding your child to the deed also has significant tax implications. Your child will not receive a “step-up” in the cost basis of the house. For instance, if you purchased your home for $100,000 in 2000 and add your child as a joint owner in 2023, their basis in the property remains the original $100,000. If they sell the house after your passing, they would need to pay capital gains tax on the difference between the sale price and $100,000. On the other hand, if your child inherits the home through a will or trust, they would receive a step-up in basis to the current fair market value at the time of inheritance. In this scenario, a sale would only incur capital gains tax on the difference between the stepped-up basis and the sales price. Consequently, a thoughtful estate plan can lead to significant tax savings, particularly in states like New Jersey, where estate taxes are no longer levied at the state level.

Other Unintended Consequences

While your intention may be to transfer your home directly to your children, it’s essential to consider other potential factors that could disrupt that goal. In the event of your child’s divorce, their interest in the home may become subject to equitable distribution as part of the divorce proceedings. Furthermore, if your child predeceases you, their interest may pass to their spouse or other individuals, potentially making you a co-owner with someone you never intended to involve in your property.

It’s also important to evaluate the implications of adding a co-owner to your home within the context of your overall estate plan. For example, if a homeowner has three children and adds her eldest daughter as a joint tenant with rights of survivorship, the co-owner daughter will receive the house outright upon the homeowner’s death, regardless of any will that aims to distribute assets evenly among the children. This discrepancy could result in an uneven distribution of assets. To achieve your distribution goals, it’s necessary to engage in careful estate planning and have a clear understanding of how each asset passes to beneficiaries.

Conclusion

While adding your child’s name to the house deed might initially seem like a simple solution for securing your home, it’s crucial to consider the potential drawbacks. Consultation with an experienced estate planning professional can help you navigate the complexities involved in ensuring the financial security of both you and your children. At Choi Law Firm, our attorneys specialize in protecting your family’s assets, and we are ready to assist you in securing what matters most to you.