Out of a desire to simplify inheritance or avoid probate, parents often consider adding their child to the title (or deed) of their home. While it is true that it can help avoid probate, this shortcut can have unforeseen consequences in the form of legal, financial, and even familial relationship problems.
Simply adding your child to your house’s deed isn’t enough to avoid probate or ensure inheritance is directly passed to them, and consulting an attorney can help you avoid costly and complicated pitfalls.
What It Means to Add a Child to a House Title
Deeds in California are typically structured with either joint tenancy with right of survivorship or tenancy in common as the ownership.
Joint tenancy with right of survivorship gives all owners equal shares in the property and makes it so that if one owner passes, the surviving owner(s) automatically inherit the decedent’s share, bypassing probate and inheritance laws. With joint tenancy with right of survivorship, no matter the terms of the decedent’s will or trust regarding the division of their property, the property will pass to the other surviving owners. If there is a specific way you wish your house to be bequeathed to your heirs, joint tenancy with right of survivorship might not be the best option for you, and deciding the best course of action is something The Dayton Law Firm, P.C. can guide you through.
When a child is added to a deed, care must be taken with how the deed is structured. Solely adding them to an existing deed without restructuring it will give them an ownership interest in the house, but will not affect your ownership interest, which would still be subject to either probate or passing along to any surviving owners named as a joint tenant with right of survivorship. A new deed would need to be recorded naming your child as a joint tenant with right of survivorship to avoid probate.
In California, joint tenancy structures give all owners on the deed equal rights and say to the property. For joint tenancy with rights of survivorship, once one owner passes, their share of the property automatically reverts to the other owners. With a deed ownership structure of tenants in common, ownership shares are not always equal, and each co-owner can leave their share to beneficiaries through a will or trust, requiring probate in California.
The Appeal: Why Parents Consider Adding a Child to Title
There are many appealing features of considering adding your children to your house’s title. On the surface, it seems like an excellent way to avoid probate court, as they will already be listed as an owner on the deed.
Adding a child to your title can also be perceived as a simpler way to ensure your wishes for the inheritance of your property are followed and as a way of saving on the costs involved in writing a will or creating a trust. The intention behind adding a child to the title of your house is generally to ensure a smooth property transfer to your beneficiaries upon your death. Consulting an estate attorney at The Dayton Law Firm, P.C. can help you determine whether this is the best course of action for your assets or if other methods are safer and more feasible.
Risks and Downsides of Adding a Child to Title
While adding your child to the title of your house seems straightforward at first glance, there are many factors that must be considered. Once your child is on the title, you no longer have sole control over the property; there are future tax implications to consider, possible liability issues, and potential relationship conflicts to take into account.
Another aspect to consider with adding a child to the title is that it can impact your eligibility for Medicaid, as adding them to the title counts as giving assets away under fair market value, and if that occurs during the 5-year lookback period, wherein Medicaid reviews financial transactions, you will be subject to a penalty period where you are ineligible for benefits.
Loss of Full Control
With the addition of another owner to the title, the full control over the property no longer rests with you. Any decisions regarding the property, including refinancing, selling, or taking out a line of credit to accommodate living expenses or needed repairs, must be cosigned by all parties on the deed. This loss of autonomy and requirement to consult with your child can place strains on familial relationships, especially if there are disagreements on how the property or equity should be managed.
If relationships change, and parties become estranged, having a joint property, for that is what adding your child to your title causes your house to become, can increase tensions and cause conflicts that might require costly legal mediation to resolve.
Tax Consequences
Tax consequences are another aspect to consider when adding a child to the title of your home.
When a beneficiary inherits a property, the cost basis, or initial value, of the property is “stepped-up” to the fair market value of the property at the time of the decedent’s death. This reduces the capital gains tax liability for the inheritor if they choose to later sell the property.
As a basic example, if the house was purchased for $100,000 and was worth $450,000 at the time of the decedent’s passing, the stepped-up value of the house would be $450,000. If the inheritor sells that property for $600,000, their capital gains tax liability would only be on $150,000, not $500,000; in essence, the tax that would have been incurred on the $350,000 difference would be eliminated.
If your child was an owner on the deed before your passing, they would not benefit from the step-up cost basis, as they are no longer inheriting the property, just assuming a larger ownership share.
Additionally, adding a child onto a home deed for no payment constitutes a gift when it comes to taxes. While generally there are no immediate tax payment requirements, gift tax forms must be filed to calculate against your lifetime gift and estate tax exemptions. Depending on the value of your home, however, taxes could be due, which does reduce the amount available in the future for sheltering estate assets.
Creditor and Liability Issues
With your child added to your title, your property also becomes vulnerable to their debts, any lawsuits against them, or any potential bankruptcy or legal financial troubles they might experience.
In all these cases, the family home is exposed to outside claims. Creditors can place liens on the home until the debt is settled, an ex-spouse could file a claiming interest in the property in a divorce (especially since California is a community property state, and most property acquired during the marriage is considered community property), and in the case of a lawsuit where the child is found liable, the property could even be seized to satisfy the judgement.
Family Conflict
Nothing sows discord amongst siblings faster than the appearance of unequal treatment, which is a pitfall that needs careful consideration if only one child is added to the title of your home. No matter the reasoning behind the decision, siblings not included on the title are likely to hold resentment that will fester and cause division in the family, creating conflicts that can quickly move from the dinner table to the courtroom.
As an example, if you have Child 1 that lives near you and helps you out and visits you frequently, and Child 2 that lives across the country, and you choose to add Child 1 to the title of your home and not Child 2, Child 2 could make a legal argument that you were unduly influenced by Child 1 into adding them onto the title as a condition of their help. This can result in a long, costly legal battle, precisely the thing you were hoping to avoid by adding a child onto the title in the first place.
The addition of your child to your deed is the only evidence of your intent for property distribution. In California, even if you have a will or trust stating that you want the property divided amongst your children, the ownership on the deed trumps them in the disposition of the house. These considerations are why it is crucial to confer with estate attorneys like those at The Dayton Law Firm, P.C. before making concrete arrangements for your estate.
Alternatives to Adding a Child to Title
Fortunately, there are alternatives to adding a child to your house’s title, and The Dayton Law Firm, P.C. can guide you to the best option for your unique scenario.
Wills, trusts, transfer-on-death deeds, and powers of attorney are just some estate planning tools that can help you ensure your wishes for your property are fulfilled after your passing.
Many of these options fulfill the purpose of avoiding probate, which is behind adding your child to the title, and also protect your intentions and your beneficiaries’ best interests.
Revocable Living Trust
A revocable living trust is one of the best options for maintaining control of your property during your lifetime and ensuring your intentions are followed after your death. With a revocable living trust, you maintain full control over your property during your lifetime – you can sell it, refinance it, take out lines of credit against it, everything you’d be able to do if it weren’t in a trust. An added benefit of a revocable living trust is that you can make changes to it or dismantle it at any time, providing you with additional flexibility should your situation or wishes change.
Property held within the trust is not subject to probate, saving your beneficiaries legal costs and time spent managing your assets after your death. Placing your home in a revocable living trust instead of adding your child to the deed also preserves the step-up basis tax benefits, helping your beneficiaries avoid higher capital gains taxes and stress.
Transfer-on-Death Deed (TOD Deed)
Another option in estate planning is a transfer-on-death deed, which has been available in California since 2016.
Unlike a joint tenancy with right of survivorship, a transfer-on-death deed does not take effect until the death of the owner (transferor). This allows you to remain in sole control over the property until your death, enabling you to sell, rent, refinance, or do anything else you wish without consulting your child.
The TOD does allow your beneficiaries to avoid probate, and can be more cost-effective than other probate-avoidance methods such as a living will or a trust. It also grants the same tax benefits regarding the step-up basis as a trust or a straight inheritance does.
However, while the requirements for creating a TOD are simple, they are very strict, and innocent mistakes can completely void the TOD, landing your beneficiaries back in probate.
Additionally, your beneficiaries will have several steps they must complete for the TOD to properly transfer the property, including notifying any potential heirs you might have, and those heirs will have the chance to challenge the TOD if they desire. Due to the risk of challenge, many title companies will refuse to issue title insurance for up to 3 years post your death, stopping any potential sales or refinancing your heirs may wish to do.
TODs also do not supersede joint tenancy with right of survivorship, so if you create a TOD but your spouse does not, and you pass before your spouse, the TOD is no longer valid. Both you and your spouse would have to sign separate TODs to account for whichever spouse outlives the other.
These considerations are why it is essential to discuss options and draw up documents with experienced estate attorneys.
Other Estate Planning Tools
Other estate planning tools can be effective at ensuring your property is divided amongst your beneficiaries as planned, but can be less effective at avoiding probate if that is the end goal.
Wills are good documents for stating how your property is to be allocated, but they still require a probate process, typically handled by the executor of your estate. The probate process can be quite lengthy in California, with the quickest turnaround timeframe being approximately 9 months. There are other, better estate planning options for a quicker resolution for your beneficiaries that The Dayton Law Firm, P.C. can discuss with you.
Powers of attorney are useful in enacting your wishes during your lifetime should you become incapacitated; however, they expire upon your death. Should you wish for that individual to continue overseeing your desires regarding the dispersal of your property, they must also be named the executor of your estate. Once again, this option does not enable your beneficiaries to avoid probate.
Coordinated beneficiary designations do help avoid probate, but they are specific to accounts and property types. Naming an individual as the beneficiary of a life insurance policy or a retirement plan allows the funds to transfer directly to the named person upon your death, per the terms of the contract with the providers. TODs are considered beneficiary-designated assets, provided there is no joint tenancy with right of survivorship that can supersede them.
These designations are also considered nontestamentary and thereby outside of the purview of a will and will control the distribution of assets over any conflicting designations in a will.
How an Estate Planning Attorney Can Help
An experienced estate attorney at The Dayton Law Firm, P.C. will help you review your family goals and the values of the property in your estate to devise a comprehensive plan that takes care of your interests and your intentions towards your beneficiaries.
There are many California-specific tax laws and probate rules that are tricky to navigate, but an estate attorney will cut through the legalese and explain them and how they apply to your estate and situation.
Meeting with one of The Dayton Law Firm, P.C.’s estate attorneys will allow them to draft a customized estate plan that meets your needs and intentions for the distribution of your assets while avoiding unintended risks and complications, saving your heirs from costly and time-consuming legal troubles.
Talk to the Professionals About Adding a Child to Your Real Estate Title
While it seems a straightforward approach to avoiding probate, adding your child to the title of your house is often not the best choice in estate planning.
There are safer, simpler alternative options that protect you, your property, and your child from complicated legal, tax, and liability concerns.To determine the best course of action and get customized, experienced estate planning and real estate transfer advice for Californian properties, contact The Dayton Law Firm, P.C. today and make sure your assets and heirs are safe.