When people talk about avoiding probate, one of the most common ideas that comes up is adding a child to the deed of their home. It sounds simple: put the child on the deed now so the property passes automatically later.
In practice, this move usually creates more problems than it solves. Of all the issues this approach can cause, two stand out:
- You give up real property rights during your lifetime, and
- You often destroy the tax benefits your child would have received by inheriting the property.
Mistake #1: You Are Giving Up Property Rights — Now, Not Later
Adding a child to your deed is a present transfer of ownership. The moment that deed is recorded, your child becomes a co-owner of your home.
That changes your legal rights in very real ways.
Once your child is on the deed:
- You no longer have sole control.
- You generally cannot sell, refinance, or mortgage the property without your child’s cooperation and signature.
- You cannot easily undo the decision.
- If relationships change, your child refuses to cooperate, or circumstances shift, removing them from the deed usually requires their consent.
- Your property becomes exposed to your child’s problems.
- If your child is sued, goes through a divorce, files bankruptcy, or has creditor issues, their ownership interest in your home can be attached or leveraged by others.
- You lose flexibility later in life.
- Many people intend to age in place but later decide they want to sell, downsize, move in with family, or use equity for care needs. Once a child is on the deed, all those options depends on another person’s cooperation and financial situation.
Parents often believe they are doing their child a favor by dealing with the deed sooner rather than later. Legally, you are giving someone a current ownership stake in what is likely your largest asset.
Mistake #2: You Can Destroy the Step-Up in Basis
When a child inherits real estate at a parent’s death, the child typically receives a step-up in tax basis to the fair market value of the property as of the date of death. This means if the home is sold shortly after inheritance, capital gains tax is often minimal or zero. Even if they decide to hold onto the real estate after you pass away, when it is eventually sold in the future there will be tax savings by letting it pass through the will as opposed to adding a child to the deed now.
When you add a child to your deed during your lifetime, you usually convert what would have been an inheritance into a lifetime gift of part of the property.
This means your child takes your original basis for the portion of the property you gifted to them. In the future, if the property is ever sold, they will pay capital gains tax for all of the gain, which is often substantial if you have been living in the same house for decades.
In other words, trying to save your children the “hassle of probate” with a deed change often creates a tax bill that would not have existed if the property had simply passed through the will at death.
The Takeaway
Adding a child to your deed often has unanticipated consequences. If the goal is to create a process that is both easy and beneficial for your children, the right choice is often letting that property run through the will after you pass away.
Regardless of what you are thinking for your estate plan, it’s always best to match the process with your specific situation. Take advantage of our free estate planning consultations today and get all of your questions answered by one of our experienced estate planning attorneys!
Stott, Hollowell, Windham & Stancil
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