PROTECTING YOUR REAL ESTATE: 5 Reasons Why Adding Your Kids to Your Title is not the Answer
Our homes are often our most valuable asset, especially in a market like Boulder. Real property has special considerations in our estate planning.
It is a common misconception that jointly titling real property will avoid probate. In reality, it only delays probate until the second spouse dies.
Should you put your kids on title to skip probate? Probably not; there are many dangers to using joint tenancy as your only estate planning tool.
Problem 1: Losing an income tax benefit
If your home is your only asset, your heirs will get to skip probate, but when your children decide to sell the property, they’ll not be able to take advantage of an important income tax saving devise known as a step up in basis. For example,
– Andy adds his adult child, Susan, as a co-owner of his home. When he dies, his home is worth $2,000,000. He purchased the home for $180,000 in 1990 and has not made any major improvements. Susan lives outside the state and decides that she’d like to sell the home.
o When Susan received the gifted interest in the home, she took Andy’s basis. This is called carry-over basis. Since she is owner of 50% of the home, her basis is $90,000 (half of the $180,000 cost basis).
o When Andy dies, Susan will get a step up in basis to the value as of Andy’s date of death for Andy’s portion of the home ($1,000,000).
o Susan’s basis at Andy’s death is $1,090,000 ($1,000,000 + $90,000). If she sells the home for $2,000,000, she will pay capital gains tax on the $910,000 gain.
Problem 2: Exposure to Creditors
The house will be subject to the creditors of all the joint owners. For example, if the child files for bankruptcy, their interest in the house may be sold or claimed by a creditor. Or, if the child fails to pay income taxes or is involved in a lawsuit, their interest in the property may be attached by the creditor.
Problem 3: Incurring Gift Tax Liability or Filing Requirements
You, by adding others as owners to the house, are giving them a gift of the value of their interest in the house. Currently, you can give annual exclusion gifts of $15,000 per donee per year. If the value of your gift is over this amount, you will need to file a gift tax return reporting the gift and possibly pay some gift tax. In addition, if you pay the entire mortgage, insurance, utilities, repairs; those will be continuing gifts to your children.
Problem 4: Incapacity
In the event that one of the joint owners becomes incapacitated, physically or mentally, the Court must get involved and approve any sale or refinancing of the property. Even if the joint owners are spouses.
Problem 5: Unintended Inheritance
A jointly titled property will be owned by the surviving joint owners. Those joint owners get to choose what to do with the property on their death. For example, a surviving spouse may disinherit her predeceased spouse’s children by passing the house on to her children. Or, a joint owner child may be unintentionally given more than their share because they receive both the property and a share of the assets controlled by the will.
These are just some of the many issues with using joint ownership as your only estate planning tool. An attorney can help you navigate these pitfalls and ensure that your wishes are executed.
Jessica R. Creevy
Hassan + Cables
1035 Pearl Street
Boulder, CO 80302
Consult your estate planning attorney or ask your realtor for a recommendation to help you investigate your estate planning options as they relate to real estate.