Placing your son or daughter’s name on the deed to your home could be viewed as a simple, low-cost estate planning technique to ensure your child receives your home when you pass. Before you do, consider these reasons why that decision could actually end up costing you much more than you think. Be sure to consult with your financial advisor and an estate planning attorney before adding a child’s name to your deed.
Property May Subject to Claims
Property held jointly is subject to claims by creditors of any of the owners. Divorce proceedings or liability litigations could negatively impact your share of ownership.
Inheritance Tax Savings or Hike in Capital Gains?
Adding a child’s name to the deed would save inheritance tax due (4.5% in PA) on the child’s share; however, the step-up in cost basis is lost on that share which could cost your child more in capital gains tax. For example, if your home’s cost basis (what you bought it for plus any additions) was $42,000 and at your death, the home is valued at $100,000, your child would inherit the house and its value as of your date of death at $100,000 as basis if you leave the home in your name only; however, if you add a child, he or she is only able to step up basis on your share of the house at your death. Your child’s share of the cost basis would be $21,000 (50% of the $42,000) and your share would be $50,000 (50% of the value on the date of your death) and so if he or she sold the house for $100,000, they would have to pay capital gains tax on the gain of $29,000 ($100,000-$71,000).
What if Your Child Passes Before You?
If your child would predecease you and you had added them to the deed, you would have to pay inheritance tax on your child’s share (4.5% in PA).
Inheritance Tax Responsibility
If you add your child’s name to the house and die within one year, he or she is still responsible for the 4.5% inheritance tax and vice versa.
Placing your child on the deed to your home may cost much more than you realize - potentially to the point of losing your home. Proper estate planning guided by financial and legal professionals is crucial in ensuring that your wishes are honored without the expense and risks noted above.
To discuss this content further or to ask any financial-life question you may have, we encourage you to reach out to us at 724.942.2639 or schedule a FREE/no-obligation time to chat with an advisor at your convenience.
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