Instead of drafting a Will, many people just put their child’s name on the deed to their house. Their goal is to make things easier for their child by eliminating the need to go through probate. If the house is the only asset, this can be an effective way to avoid probate. (If there are other assets besides the house which they still own in their sole name – their child will still have to go through probate.) In Maryland, though, probate is not a particularly daunting or expensive procedure. In my opinion, the disadvantages of putting your child’s name on the deed far outweigh the advantage of avoiding probate.
Loss of Control
When your child’s name goes on the deed, your child becomes the legal co-owner of the house. Should you at some point want to sell the house and move to Florida, your child must agree. If they don’t agree, you cannot sell. No Del Boca Vista for you!
Inheritance by Others
If your child dies before you, depending on the way the deed is worded, your child’s ownership interest in the house could pass to their heirs. You could end up owning the house with your son-in-law. Definitely no Del Boca Vista for you!
Exposure to Creditors
Because your child is now a joint owner of your house, your house is also your child’s asset. Your house is now exposed to your child’s creditors. If your child runs into tax problems, a tax lien could be filed against your house. If your child declares bankruptcy, your house may have to be sold. If your child is sued as a result of a motor vehicle accident, your house could be attached.
Putting your child’s name on the deed may seem like a simple transaction, but it is legally a gift of half the value of your house. If your house is worth more than $26,000, a federal gift tax return is required to be filed.
Capital Gains Tax
When you put your child’s name on the deed, the child is considered to have acquired their half of the house at half of the same price you paid for the house. Let’s say that the house you paid $100,000 for 30 years ago is now worth $500,000. (Now that’s wishful thinking!) Your child now owns half the house and is considered to have acquired it for $50,000. After you die, if your child sells the house for $500,000, the child will have to pay capital gains tax on the half of the house they acquired before you died. In this scenario your child would owe capital gains tax on $200,000. (This assumes the house is not your child’s primary residence.)
Conversely, when your child inherits the house after your death, they take the property at your date of death value. Even though you only paid $100,000 for your $500,000 house, your child is considered to have acquired the property for $500,000. Thus, if your child then sells the property for $500,000, there is no capital gains tax.
Medicaid is a quasi state/federal program that will pay for nursing home care for individuals without sufficient resources. In the application process, Medicaid looks for whether the individual has given money away in an attempt to become eligible for benefits. Putting your child’s name on your deed is considered a gift and as such may trigger a period of ineligibility for Medicaid benefits.
By David Galinis