Putting your child on your home title could cost them dearly in taxes
By Libby Banks, The Law Office of Libby Banks, PLLC
From time to time, I have clients and friends ask me about the wisdom of putting their adult child or children on their home title (or stock accounts). Their thought is that they can avoid probate that way when they pass. My short answer is “Don’t do it!” There are many pitfalls in doing this instead of putting a proper estate plan in place. Let’s look at a few of those pitfalls.
Your Child Will Pay More in Taxes
Part of any estate plan we prepare involves some thought as to taxes. It’s part of our goal to help you keep your hard-earned money in your and your heirs’ wallets. When you change title to property and put your child on as a co-owner, you have made a lifetime gift, and that gift may cost your children dearly in capital gains taxes.
Why is this? When we sell an asset, including a home or other real estate, the capital gains we pay is calculated on what we sell the property for less the value of the property when we purchased it. The value of the property at purchase is called your basis. Here in Phoenix, with the increases in real estate values, we all know that our potential gains are substantial. If you put your child on title during your lifetime, the basis of the property when they sell it is what YOU paid for the home.
An example will help show just what this means. You put your child on the title to your home. If you bought your home for $200,000 (that is called your tax basis) and it is valued at $600,000 at your death, your child pays capital gains on $400,000 when they sell the home, because they must use your original tax basis for payment of the capital gains tax. On the other hand, using these same numbers, if your child inherits the home from you, they get a step up in basis to the value of the property at the time of your death. If it is valued at $600,000 when you pass, and they sell soon after for around $600,000, they will pay little to no capital gains taxes.
Saving your children from taxes is one very good reason not to put them on title during your lifetime. Instead, think about creating an estate plan with a revocable living trust to allow your child to easily inherit the property on your passing with no probate court proceeding. They save taxes, time, and money on wrapping up your estate.
You Lose Full Control of Your Property
Another reason to keep your home in your name is to assure that you have full control over your own home. When you put someone else on the title, they now own it too. What if you want to sell and they don’t think you should? You can’t sell it without their signature. What if a reverse mortgage would help you financially? You can’t do a reverse mortgage with that young person on your title. Again, what if they think it is a bad idea? You may be stuck with your current situation and unable to move forward – at least not without a potential court battle. Think it can’t happen to you? We have seen these exact scenarios come up with clients and friends. Don’t put yourself in a position to have someone else in control of your property.
The Bottom Line on Joint Ownership
To avoid increased taxes for your children or other heirs, and the possible problems we talked about here, don’t put someone else on your property as a joint owner during your lifetime. While avoiding probate is an important goal, doing it the wrong way, like putting your heirs on title to the property, can cost your heirs far more than a probate case would cost. Our office can help you put a plan in place that will avoid probate, let you maintain control and save your children money in the future. Give our office a call at 602-375-6752 or visit our website at libbybanks.com.