Why Adding Your Children to Your Home Is No Replacement for Estate Planning

We want to ensure our children are cared for when planning for the future. We want to ensure they have the easiest path forward during your later years and passing. Some homeowners may consider adding their children to their home as a cheaper form of estate planning.

You may not know that this can come back to haunt you.

If you are considering adding your children to your home, reconsider your options. You have alternatives that can protect your estate and give your children the support they need. Here is what you need to know about your home’s role in estate planning and how to make the most of your situation.

Why Should I Not Add My Children to My Home?

Making an estate plan to be followed after your death can be daunting, but it can save a lot of heartache, difficulty, and confusion for you and your children, both then and now. That is because adding your children to your home to avoid estate planning may incur more costs and difficulties than expected.

Unfortunately, adding your children to your home puts you at risk of losing property and assets. Even if you have a great relationship with your children, doing this can leave you both vulnerable to unfortunate situations and expenses that can hurt your finances and even damage your relationship.

Unsure how estate planning can help you? Here are a few situations clients may face when adding children to their homes, especially without the legal support of a proper estate plan.

Taxes May Be Costly

When you add your children to your home’s deed, this action may incur serious taxes that can impact your children’s future. If you add your children to your deed, they may incur gift taxes, which can be thousands of dollars more than the cost of probate or simply speaking with a lawyer for help with your estate planning.

This misstep can have a big impact on your finances and your children’s. Worse, in cases where your child passes away before you, you may face inheritance taxes on your home, as ownership of the house would return fully to you.

Your Assets May Be At Risk

When you add your children to your home, you give them power over one of your most significant assets. Unfortunately, even your most trusted family members can face debt or litigation because they also own your property. If something happens, this situation could lead to problems as serious as losing your home.

That also becomes a problem for Medicaid planning in some cases. Medicaid looks at all assets in your name, and in some cases, you may need to reduce your assets to get Medicaid and avoid other, more costly insurance options. If your home is entangled by adding your children to the deed, filing for Medicaid may get much more complicated.

If a loved one has a partial stake in your home now, rather than being connected through a transfer-on-death deed or a trust, they have more control over it than you may want to allow. That is especially problematic if you are still living in the home, not a nursing home facility.

A Disagreement Can Become Costly Litigation

We all have disagreements with loved ones at times. However, when the property is involved, a disagreement can turn costlier.

When you and your children share property ownership, you may disagree on what to do with the property. When the property is shared without supporting documents stating your plans for it, it can lead to a lawsuit to settle disagreements.

That can be expensive, as litigation can take time and effort to settle fairly. In worse cases, you may have trouble reclaiming your home in this situation, which can lead to many difficult decisions.

This can even impact you if your child is involved in a disagreement you are not a part of. For example, your child may be going through a divorce. If their name is on your deed, your house may now be part of the assets considered in their divorce proceedings, which can hurt them. You or your child may be impacted by liens or judgements related to your home.

It Can Hurt Your Child’s Financial Future

If you add your children to your home, your family may be subject to a capital gains tax. This tax is levied against you when you sell an investment based on the profit made. As our homes typically increase in value over time, this can be a major problem for your children.

If your child is put on your deed, they also get your basis, or in other words will be impacted by the amount you bought the house for. As this will also count for your child, if they sell your house later, they may face capital gains taxes for the difference between what you may have purchased your house for years ago and what they sold it for. That cut in profit can be an unpleasant surprise and may even leave your children in financial trouble.

Worse, if passing down your house was done differently, your child could benefit from a tax break called a step up in basis. That means, by adding your children to your deed, they may not only be missing out on a tax break but also taking a financial penalty.

Your Options for Passing Down Your Property

While adding children to your home is not the best option for families, what are your options? Fortunately, you have plenty of options depending on your needs and wishes. Your estate planning attorney can help you determine the best path to passing down your property.

Below are just a few options for an estate plan that gives you agency and choice in what happens to your home while protecting your loved ones from lengthy probate, high taxes, and interpersonal problems that may arise when sharing property.

Create a Trust

In many cases, a trust is the best option for the family to avoid a long stint in probate and to protect surviving family members from severe tax penalties. A trust is an agreement that allows a third party, or trustee, to hold assets for another party or beneficiary. This trust allows you to decide how your assets and money will be managed during your lifetime and how they will be passed down to loved ones.

A trust saves a lot of time, paperwork, and even taxes because your instructions for dividing and passing down your property are already set. If your assets are already handled in this way, your family may even avoid probate.

Trusts can also be changed and may be revocable in some cases. This flexibility allows you to change your decisions for any new grandchildren, for example, who you may want to include.

Create a Beneficiary Deed

A beneficiary deed, or transfer-on-death deed, is a type of deed that transfers your property to a beneficiary upon your death. That means you will retain power over your property for the duration of your life before your property is passed on following your passing.

With this type of deed, you can keep control of your property for as long as you are alive and own the property. That grants you the freedom to live on your own property and use it however you want, without the strain of sharing that ownership with another party. This type of deed also allows you to revoke this agreement, so you can change your estate plan if something changes.

Prepare Power of Attorney and a Comprehensive Plan

Some people choose to add their children to their homes to give them some control over their homes if they lose their ability to care for themselves and must enter a nursing home. With power of attorney and a comprehensive estate plan, however, you can rest easy knowing your home cannot be taken to pay for your nursing home stay.

Power of attorney gives another person the power to make medical, legal, and financial decisions if you cannot make those decisions yourself. If a trust or other agreement already protects your home, your family can use power of attorney to ensure your needs are met and your best interests are carried out.

How an Estate Planning Attorney Can Help

Making an estate plan can be intimidating, but it can also save you and your family money, strain, and effort in the future. That extra peace of mind can be invaluable now, during any major illnesses, and following your death. Adding your children may only compound those negative feelings at a time when you should be able to enjoy your time with your loved ones.

But how do you enact the right estate plan for your family and assets? The lawyers at Germany Law Firm are here to help with that. If you struggle to create an estate plan that works for your family, consult our estate planning services. We are here to help families of all sizes and situations get the solutions they need for passing on homes and other assets. When you are ready to speak with a lawyer about your estate plan, call or fill out our online contact form.

Contact us to schedule your initial consultation.