When considering one’s own estate plan, parents oftentimes ask themselves: should I simply add my child to my deed? By doing so, parents seek to make their children’s lives easier; however, oftentimes, adding a child to a deed may create additional issues that are embedded in the complexity and interrelatedness of the tax code, real estate law, and probate law.
While estate taxes became a less important consideration with the lifetime gift exclusion going up to $11.48 million, every estate planner should be concerned with potential income taxes on capital gain that come with inherited assets.
Whenever a lifetime gift is made, a Form 790 gift tax return must be filed. Many revel at the fact that no gift tax is paid for lifetime transfers in amounts lower than $11.48 million. However, it is important to understand that by receiving a lifetime gift, the child also receives the unrealized capital gains tax, which will be paid upon the sale of the asset. For instance, if the house was purchased for $100,000, and at the time of the transfer the house is worth $1 million, the capital gains on the house would be $900,000. If you add your child on the deed, you are effectively transferring your child one half of the asset, and $450,000 of the capital gains would be allocated to your child, on which he or she will pay capital gain taxes when the house is sold, whether it is during your life or after you pass away.
Although this may not have immediate consequences, it definitely affects the child when he or she finally decides to sell the house, or it can potentially affect you as a parent. Namely, if you transfer interest in your primary residence to a child, on which first $500,000 would be excluded if the house is sold during your life, is no longer available because this exclusion does not apply to the half owned by your child. In the scenario mentioned earlier, as soon as the house is sold, the child would be subject to capital gains tax being charged on $450,000. This scenario can be easily avoided by transferring the property into a trust. By doing so, the capital gains tax issue is easily absconded or mitigated.
Having Another Legal Co-Owner
When adding another person to the deed of your property, it is vital to understand that that person has a right to decide the future of the transactions regarding the asset. For instance, if you, as a parent, want to take out an additional loan or apply for a home equity line of credit, there are extra hoops you would need to jump through. If there is a mortgage on the property, you may sometimes need to obtain permission from the mortgage company to add your child to the deed.
By adding your child to the deed, your child will be seen as a fully entitled owner of the property, whose share may be accessed at any moment. This presents an array of issues because it opens up your asset to the privy of potential creditors of your child. For instance, if your child ends up being in debt to creditors and/or has a judgment against him or her, those creditors can legally seek to recover from your child’s share of the home.
The law oftentimes grants individuals creditor protection for their primary residence. However, when a child is added onto a deed but does not reside there, the property will not enjoy the same protections. In the most grim of circumstances, having a non-residing child on the deed may open up to creditor attacks on that child’s share, forcing the house into foreclosure and the parents into an eviction proceeding.
A judgment against your child does not necessarily need to arise from poor financial choices or spendthrift tendencies; you child may end up with a judgment against themselves by simply being sued in a personal injury or motor vehicle accident. In such a case, the judgment against your child can easily attach to that child’s interest in the home. This may become particularly problematic if a child is added as a shareholder or tenant-shareholder to the stock certificate of a cooperative apartment. More specifically, if a lien or judgment is filed against the child, that judgment/lien will automatically attach to the cooperative apartment. The consequences of such an attachment end up preventing the shareholders from transferring or selling their interest, or from refinancing the loans associated with the cooperative apartment, until all judgments, liens, and debts are dealt with. This is a prime example of how parents’ hard earned assets become dependent on the financial stability of their children, exposing the parents to unnecessary financial complications.
Another scenario that may arise is that, if your child ever divorces their spouse, the spouse may argue that the house is subject to distribution as a marital asset. In such a way, the house may become a pawn in the divorce proceeding and may implicate your interests directly.
When determining the best course of action – whether it be to create a trust, simply pass the property in a will, or create a legal entity to take possession of a property – it is always best to discuss your concerns and financial goals with an attorney. An attorney can properly advise you on your options and provide the best pathway to take.
It is critical to engage an attorney who will guide you and help you throughout this process as your advocate and guide.
At Beress & Zalkind PLLC, our attorneys are experienced in all kinds of real estate transactions in New York and New Jersey. We work closely with the title company on the transaction to assist and facilitate a smooth closing.
Call us at 718 513 3500 or send us an email at email@example.com if you want to discuss your transaction.