As a way to simplify the transfer of a home, family camp, or land, you may be tempted to add a child or other relative to the deed as a joint tenant (or “joint tenant with rights of survivorship.”) While on the surface this might seem like a cheap and easy method to accomplish your goals, it can lead to several unforeseen pitfalls.
In a joint tenancy, when one owner dies, the other owner(s) inherit the deceased owner’s share of the property. The obvious benefit is that this form of ownership transfers to the surviving owner(s) automatically without going through probate. On the surface, this seems like a smart way to streamline the inheritance process, sidestep creditors, and avoid court and legal costs. But there are some major risks that you should consider.
You May Pay a Price
One of the main problems with adding a child to a deed using joint tenancy is that you open yourself up to additional liability. When you agree to a joint tenancy, the property becomes subject to the other owner’s creditors, ex-spouses, and other potential liabilities. Their debt could even result in a forced sale of your property.
Another problem with joint tenancy of real estate is that there are multiple owners of the property. You’ll now need the approval and signatures of the other owners if you want to mortgage, refinance, transfer, or sell the property. It doesn’t matter if you’re the only one occupying the property or paying the bills – by adding additional owners, you are giving away control.
Tax Problems
Adding a child as a joint tenant on your property also exposes them to otherwise avoidable capital gains taxes. When you sell certain assets, the government taxes you. But when you’re taxed, you can deduct the cost basis (a measure of how much you invested in it). For example, if you bought vacant land for $200,000 and later sell it for $315,000, you’d only be taxed on the $115,000 capital gains. However, your heirs can get a break on these taxes. For instance, let’s say you die, and the fair market value of the land at the time of your death was now $400,000. If you used a trust rather than joint tenancy, your heirs inherit the property at a cost basis of $400,000 – its value at the time of your death. This is called a “stepped-up basis.” If your heirs then sell the property for $400,000, they won’t have to pay any capital gains taxes. But with joint tenancy, your child won’t get that step-up in basis and could have to pay much more in capital gains taxes.
And one more note about taxes – when you add your child as a joint tenant on your house, you are making a gift to your child. This gift should be reported on a gift tax return for the year that you made the gift. Depending on your net worth and other taxable gifts that you have made during your lifetime, this gift could have adverse tax consequences including interest and penalties.
Medicaid Considerations
Also keep in mind that Medicaid has a five-year lookback period. If you’ve added your child to your property deed within 5 years of applying for Medicaid, it could result in Medicaid penalties or a period of ineligibility. So if you think that you may need to apply for Medicaid benefits in the future, speak to an attorney about the implications of adding a child to your deed.
When considering all of these issues, it’s easy to see that the cost of adding your child to the deed on your home may be significant. Fortunately there are alternatives that may work, such as using a revocable trust. To learn more, please contact Beaupre Law today!