Pittsburgh Family Law Services, P.C. Blog

To avoid probate, parents often consider adding their adult child to the deed to their home. Although it may seem like a way to streamline distribution, there are multiple issues that can arise in this situation. Before adding your child to the deed of your home, it’s important to consider these issues and discuss them with an experienced estate planning attorney.

1.    You may not avoid probate. Your probate estate doesn’t just consist of your house. While it’s likely one of the largest assets you have, your probate estate will also consist of items such as bank accounts and vehicles. If you have these types of assets, your child will still be required to open an estate and go through the probate process.  

2.    You cannot avoid inheritance taxes.  Many parents mistakenly believe that if they keep an asset out of probate, that their children will not be required to pay Pennsylvania Inheritance Tax. This is not true. Jointly owned property with rights of survivorship is still subject to the Pennsylvania Inheritance Tax. If the transfer is made within one year of death, the full value of the property will be subject to the Inheritance Tax. Adding your child’s name to the deed will not avoid this. 

3.    Your children may face steep capital gains taxes.  To explain the math, let’s look at an example. Say you bought your house when it was worth $150,000. Over time, that value has now increased to $350,000.  The $200,000 difference is subject to capital gains tax if you decide to sell the home. When a child inherits a home through a Will, the new value of the home is $350,000—it’s value on the date of death. If your child sells the home a few years later, the capital gains tax will be the difference between the property’s value on your date of death and the value of the property of the value when she goes to sell. When you add someone to the deed, that surviving owner loses the “stepped up” cost basis. In practice, this means that if your child decides to sell the property, she will be subject to the full $200,000 between the time that you purchased the home and the time that it is sold. Not only will your child not avoid Pennsylvania Inheritance Taxes, she will also lose a valuable tax advantage. 

4.    You lose control over your property: This is the part that most parents don’t consider. When you add someone to your home, they now have just as much rights as you do in the property. In practice, this means they will have a right to live in the home and any decisions about selling the home or refinancing a mortgage will need to be made with your child’s active consent.

Of course, parents look to add their child to the deed because they have a good relationship and they trust their child. While everyone hopes it will remain that way, nobody can predict the future. You may have reasons for wanting to sell the house that are just as valid as your child’s reasons for wanting to keep the house. If your child gets married and later divorces, the property will be treated as an asset subject to Pennsylvania Equitable Distribution. All of these issues can create a lot of distress in families and you have no way of knowing at the time you put your child on the deed whether they will arise.  

5.    You may not be able to do this without paying your mortgage immediately.  Many mortgage lenders have a clause which allows the company to demand the entire balance of your mortgage for any changes in ownership. This includes adding someone to the title of your property. Before considering this, it’s critical to read your mortgage documents carefully.  

There are many other issues that can arise with adding your child to the deed, including the loss of important Medicaid benefits. There are scenarios where it may make sense or be worth the risk to add your child. But before taking that step, it’s important to consult with an estate planning attorney who can advise you on whether this decision is in your best interest.  

Various estate planning techniques allow you to transfer your home to your child without the risks described above. Transferring the home to your child through your Will streamlines the probate process which ultimately reduces the amount of time and expense. Transferring the property through a trust bypasses the probate process entirely. There are multiple types of trusts that can be used depending on your needs, goals and concerns. 

With the help of an estate planning attorney, you can smoothly transfer your home to your child without the risks that come from directly adding her to the deed.