Owning property jointly with your children or another beneficiary is a common method used to avoid probate. The idea is that they'll inherit the property from you automatically because they already "own" your property. It doesn't become part of your probate estate because it passes directly to them by operation of law when you're no longer alive to co-own the property with them. This can be an effective option if avoiding probate of your estate is your primary goal.
Prepare a New Deed to Avoid Probate
Ideally, you won't just "add" your child's name to your existing deed. Instead, you'll create a new deed with a group of owners, perhaps you, your spouse, and your child. You'll become joint tenants with rights of survivorship.
If you simply add your child's name to your existing deed, he won't necessarily have rights of survivorship. He won't automatically inherit your share of the property when you die. Adding the name only gives him an ownership interest in the house both currently and in the future, while your ownership interest would still be subject to probate.
Creating a whole new deed with rights of survivorship sidesteps this problem. "Survivorship" means that when one owner dies, their share of the property shifts by law to the owner or owners who survive them.
Consider Using an Attorney
You can purchase the appropriate software or a deed form from any office supply store or legal website to create a joint tenancy deed, but consider working with a local estate planning attorney or a real estate attorney instead.
One wrong or a missing word on your joint tenancy deed can lead to probate of the property.
State laws can be very specific about how a deed must be worded to create rights of survivorship, and these forms and software aren't always state-specific.
A beneficiary deed, also sometimes called a transfer-on-death deed, might be an alternative to creating a deed with rights of survivorship if you live in a state that recognizes these instruments. About half of all states do, as well as the District of Columbia. The issue is not necessarily where you live—it might be a second or vacation home. The laws of the state where the property is physically located are those that prevail.
You're not adding your child as a new property owner during your lifetime with this type of deed. Rather, he would receive your property only at your death. A deed with survivorship rights can help you avoid many potential problems that might crop up if you share ownership with him while you're alive.
You—or Your Estate—Might Owe a Gift Tax
In 2021, when you give anyone anything that exceeds $15,000 in value, the Internal Revenue Service says it's a taxable gift (changing to $16,000 in 2022). This includes creating a new deed that gives your child a current ownership interest in your home, assuming she doesn't pay you fair market value in exchange.
The balance over $16,000 would be taxable—to you, not the recipient of the gift. This limit is called the annual gift tax exclusion, and it's indexed for inflation so that it can increase yearly. But a lifetime gift tax exemption is available as well. This exemption lets you avoid paying any gift tax on the transfer.
The Unified Tax Credit
The gift tax and the estate tax share the same lifetime exemption—they're "unified." If you give away a lot of expensive property during your lifetime, filing Form 709 each time effectively shifts the balance over the annual exemption amount each year to your lifetime exemption.
Ultimately, this approach leaves less of an estate tax exemption to shelter your remaining assets from estate taxes when you die; But because the same credit shelters both the gift and your estate, that's somewhat moot.
That said, here's a bit of good news: The lifetime gift tax/estate tax exemption is $11.7 million per donor in 2021 and $12.1 million in 2022.
Most people will not trigger estate taxes when they leave an estate to their heirs because of the high exemption.
That's a lot of property. If you're able to use a beneficiary deed, the estate tax involved with transferring the property that way would be covered by the same lifetime exemption. Keep in mind that any assets that escape probate contribute to your taxable estate.
Capital Gains Tax Issues
Your child will receive a step-up in the tax basis of the home if it passes to her when you die, either through probate or via a beneficiary deed. A step-up in basis minimizes any capital gains tax they would have to pay if they decided to sell the property for more than you paid for it.
Capital gains tax is assessed on the difference between the initial purchase price and the property's sales price. The "step-up" moves the home's value up to what it was worth on the date of your death, not the price you paid when you bought it.
If you've owned the property for a considerable time, the stepped-up basis is probably significantly more than what you paid for it, which is a good thing. It means there will be less of a difference between the purchase and sales price—meaning capital gains taxes.
The home will not receive a step-up in basis after your death if you create a joint tenancy with your child by making a new deed during your lifetime. They would have to inherit the home instead. Otherwise, your child would owe capital gains tax based on what the property was worth when you initially bought it.
Potential Problems With Joint Tenancies
You won't be able to sell the property, refinance the mortgage, or take out a new mortgage without your child's consent if you give him partial ownership in a joint tenancy deed. These actions require the consent of all owners.
Worse, your child could legally sell his interest in the property to a third party, perhaps to a stranger, without your consent if you don't word the deed correctly.
If your child ends up with a tax lien, creditor problems, or in divorce court, the government, creditors, or his ex-spouse can claim your home or at least your child's ownership share of it in a joint tenancy situation. In that situation, the entity can place a lien on your property and attempt to force its sale to collect on its debt.
You'll also make a transfer of an asset that will delay Medicaid eligibility if you apply for assistance within five years after creating a joint tenancy deed. You've effectively given a portion of your property away, which can affect the timing of eligibility.
What Should You Do?
Although you can avoid many of these problems by using a beneficiary deed, the option to do so might not be available where you live. Creating a joint tenancy deed with your child instead can be tricky business, so you might want to consult with an experienced attorney to weigh the unique pros and cons involved in your particular situation.
Don't Forget to File the Deed
Whichever option you use, it's not just a matter of drawing up a new deed, signing it, and sticking it in your desk drawer or safe deposit box. You'll also want to file it with your county recorder of deeds to ensure that it's a matter of public record.