Why You Might Think Twice Before Adding Your Kids to Your Home Title

Hello everyone, let’s dive into a topic many families consider: whether or not to add your children to the title of your home. It’s a common question, especially among parents looking to simplify inheritance. But, is it really as straightforward as it seems? Let’s explore.

Adding Kids to Your Home Title

Many think adding their children to their home title is a smart move to bypass the complicated probate process after passing away. It seems like a simple solution: just add your child as a co-owner, and they’ll automatically inherit the property, right? Not so fast—there are several important factors to consider.

The Tax Implications

When you add your child to your home title, you’re essentially giving them a portion of your home. This can have big tax implications, like gift taxes if the value exceeds a certain amount (currently $18,000 in 2024). Plus, you might be giving up valuable tax benefits that come into play when you pass away, such as the “step-up in basis.” This rule allows the property value to be recalculated at its current market value upon inheritance, potentially saving on capital gains tax. By adding a child to the title now, you might inadvertently create a larger tax bill for them later.

Potential Legal and Financial Risks

Adding a child to your home title doesn’t just involve taxes; it could open up a can of worms in other areas of your life, too. For example, if your child has financial troubles, undergoes a divorce, or encounters legal issues, your home could unexpectedly become part of those disputes. Additionally, if your home still has a mortgage, transferring part ownership could trigger a “due on sale” clause, complicating matters further.

The Alternative: A Living Trust

So, what’s a better way to ensure your home passes to your child without these headaches? Consider setting up a living trust. This legal tool allows you to transfer ownership of your home into a trust, which you control during your lifetime. Upon your passing, the home can be passed on to your beneficiaries without going through probate, avoiding many of the issues associated with direct gifting.

Real-Life Consequences

To drive the point home, consider this real-life scenario: a person gifts their commercial property to their children during their lifetime to avoid estate taxes. However, this well-intentioned act resulted in a huge tax burden for the children when they sold the property because they inherited the parent’s low tax basis. Had the parent simply held onto the property and allowed it to transfer upon their passing, the children could have benefited from a stepped-up tax basis, significantly reducing their tax liability.

Final Thoughts

While adding your child to your home title might seem like a quick fix to avoid probate, it’s crucial to consider the long-term implications. Taxes, legal risks, and loss of control are just a few potential drawbacks. Before making any decisions, it’s wise to consult with a professional who can help you navigate the best path for your family’s unique situation.

Ready to explore safer, more effective ways to pass on your home to your children? Let’s discuss how setting up a living trust or other estate planning strategies can offer peace of mind for you and your loved ones. Contact me, Jonathan Alexander, at (949) 334-7823 for a personalized consultation. Together, we can ensure your estate planning aligns with your wishes and protects your family’s future.