Perhaps you're thinking ahead and you want your kids to have the house some day. You might
think that deeding your home to them now (inter vivos gift) will provide some certainty for their
future and give them some skin in the game. Maybe you want to do this to avoid
probate.
Whether you add the
children as additional joint owners with yourself, or you convey it entirely to
them by quitclaim deed, there is the potential for conflict, as well as legal
and tax issues. There are several reasons why deeding to your children now may not be a good
idea.
Multiple joint
owners can mean multiple conflicts.
One of them wants to sell their interest? Under joint tenancy, the other joint owners (and their
spouses) will need to agree to it and sign the deed. But if the property is owned as tenants-in-common, any one owner can independently sell, mortgage, or give away their individual interest in the property. You could end up having a total stranger co-owning your property.
Higher taxes. When children inherit property, they inherit it at at the market value on the date of death--stepped-up basis. This minimizes the capital gains tax when the children sell the property shortly afterwards. But if the property had been gifted to the children while you're alive, for tax purposes the property is viewed as being owned by the children at that time. Thus, the taxes are based on the price you paid for it, which was probably much less than it's worth now. The children are liable for taxes based on the much greater difference in value, which could be a major financial burden for them.
Gift taxes come into
play, as well. The current annual gift tax exclusion is $15,000 per child per parent.
If you deed your home to your children--in part or in whole--you may be subject
to gift tax liability for amounts above that exclusion.
Divorce--the fly in the ointment. If one of the joint owners is going through a divorce proceeding, the property will be considered a marital asset. Even if the divorce decree is from another state, the out-of-state ex-spouse will still need to sign off on the deed transferring the ex-spouse's interest in the property before the title is clear and the property can be transferred to a buyer.
Insurance issues. Property insurance will now include all joint owners on the policy. If someone sues one of the joint owners, the plaintiff would be able to pursue the assets of all of those joint owners if insurance doesn't cover all of the liability.
Judgments. If any of the joint owners has a judgment against them, such as for a personal injury lawsuit or a business deal gone south, the property could be targeted for satisfying the judgment.
Mortgage and expenses. If there is a mortgage on the property, will there be an arrangement in place for the joint owners to split those payments? What if one joint owner loses their job or just stops paying their share of costs? Don't forget apportioning property taxes, utilities, maintenance, etc. Will every joint owner pay their fair share?
Creditors. If one of the joint owners files for
bankruptcy, the property could be considered an asset available to creditors
and fair game for seizure or sale.
Medical Assistance claims. If you or your spouse need state Medical Assistance, there is a lien placed on the home. The surviving spouse gets to live in the home after you die, but after your spouse passes, the state pursues repayment through sales proceeds from the house, which complicates things for the remaining owners--your kids.
As you can see, deeding property to your descendants while you are still alive is fraught with hazards. It might be better to consider a transfer on death deed (TODD). With a TODD you still have full ownership and use of the property while you are alive. The title only passes to the beneficiaries after both you and your spouse has died. The TODD still allows you to avoid probate. However, it doesn't remove Medical Assistance claims, but the house can be conveyed to your beneficiaries and sold to pay off the MA claims. Any remainder from the sale would go to the beneficiaries.
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Giving valuable property to your loved ones can create some issues for them when they inherit. Talking to a qualified attorney or tax advisor is a good idea when you are planning how best to distribute your assets.