Should My Parents Add Me to the Deed of Their Home?

Adding an adult child to the deed of a home is a question that many families consider as part of estate planning. While it may seem like a simple and effective way to avoid probate or simplify inheritance, there are several key factors to weigh. Adding someone to the deed of a home can have significant legal, tax, and financial implications that should be carefully considered. Here’s a closer look at a few considerations from an estate planning perspective.

1. Gift Tax Implications
   When a parent adds a child to the deed, it’s considered a gift of half the property’s value. If the value of this “gift” exceeds the annual gift tax exclusion (currently $18,000 per recipient as of 2024), the parent may need to file a gift tax return, and it could impact their lifetime gift and estate tax exemption. This is something to discuss with a tax professional to avoid any unintended tax consequences.

2. Loss of the Step-Up in Basis
   One of the biggest financial disadvantages of adding a child to the deed is the potential loss of the “step-up in basis.” Normally, when a property is inherited, the heir receives a step-up in basis to the property’s fair market value at the time of the original owner’s death. This can significantly reduce or eliminate capital gains taxes if the property is later sold. However, if the child is added to the deed during the parent’s lifetime, they may inherit the parent’s original cost basis, which could lead to a large tax bill if they decide to sell the home in the future.

3. Exposure to the Child’s Liabilities
   Adding a child to the deed can expose the home to any financial liabilities the child may face. For example, if the child has significant debts, creditors may be able to place liens on the home. In addition, if the child goes through a divorce, the property may become part of the marital assets, which could lead to unintended complications.

4. Loss of Control Over the Property
   Adding a child to the deed gives them partial ownership of the home, meaning they have a say in decisions about the property. If circumstances change - such as if the child wants to sell the property or disagrees with the parent about managing it - this can lead to conflicts.

Alternative Options to Consider

If the goal is to pass the home to children without the complexities listed above, there are other estate planning strategies that can help.

1. Revocable Living Trust
   One of the most effective tools to transfer property without probate is a revocable living trust. By placing the home in a trust, parents can maintain control over the property during their lifetime, designate beneficiaries, and avoid probate when the time comes. This also preserves the step-up in basis, potentially saving the heirs a large capital gains tax bill.

2. Transfer-on-Death (TOD) Deed
   In some states, including California, parents can use a Transfer-on-Death (TOD) deed, which allows them to name a beneficiary who will inherit the property outside of probate. This deed does not take effect until the parent passes away, so it does not have the same tax and liability implications as adding a child to the deed during the parent’s lifetime.

3. Gifting the Home Through a Will
   For families who do not want to establish a trust, leaving the home to a child in a will is another option. While this would still go through probate, it avoids some of the other complications associated with adding a child to the deed during the parent’s lifetime.

Final Thoughts

Adding a child to the deed of a home is not a one-size-fits-all solution. While it can offer certain advantages, the potential downsides -especially regarding taxes and liability - not be overlooked. Before making any changes to the deed, it’s essential for families to consult with an experienced estate planning attorney and a tax advisor. By considering the full range of estate planning options, parents can find a strategy that best meets their goals, protects their assets, and minimizes potential tax and legal issues for their heirs.

If you or your parents are considering adding a child to the deed, or if you want to explore other probate-avoidance strategies, contact On Point Estate Law at 619-273-3329 or schedule a complimentary consultation here. We’re here to help you make informed decisions that best support your family’s goals and protect your legacy.