Adding a child’s name to the title of real property can have several potentially catastrophic consequences, including tax implications, loss of control, exposure to the child’s creditors, and complications with estate planning. Below is a detailed look at several reasons why this action can be problematic:
1. Capital Gains Tax Issues
Adding a child’s name to the title can affect the property’s tax basis. If the child sells the property later, they could face significant capital gains taxes. This is because the child’s basis in the property would generally be the same as the parent’s original basis, rather than the market value at the time of the parent’s death. This loss of a “step-up” in basis can result in a higher taxable gain.
2. Loss of Control
Once a child is added to the title, they legally co-own the property. This means any decisions regarding the property, such as selling or refinancing, require the child’s agreement. This can be problematic if the child does not agree with the parent’s decisions or if there are family disputes.
3. Exposure to Child’s Creditors
If the child has or develops financial problems, their creditors can place liens on the property, potentially forcing a sale to satisfy the child’s debts. This can put the property at risk if the child faces bankruptcy, lawsuits, or other financial issues.
4. Complications with Estate Planning
Including a child’s name on the property title can complicate the parent’s overall estate planning strategy. It can disrupt the intended distribution of assets, create conflicts among heirs, and make it difficult to alter the plan if circumstances change.
5. Inheritance Disputes
If there are multiple children or other heirs, adding one child to the title can lead to disputes among siblings or other family members. This can result in legal battles and strained relationships within the family.
Alternative Solutions
To avoid these potential pitfalls, consider alternative estate planning tools, such as:
- Revocable Living Trusts: These allow the parent to retain control over the property during their lifetime and designate beneficiaries without the property going through probate.
- Ladybird Deeds: In Michigan, these allow property to be transferred to a designated beneficiary upon the owner’s death without going through probate.
Consulting with an estate planning attorney is crucial before making decisions about transferring property to ensure that the chosen strategy aligns with the parent’s overall goals and circumstances. These are not decisions or plans that should be taken lightly.
WE CAN HELP
The estate planning attorneys of Penzien Legal Group, PLLC have been helping families and business owners with their estate planning needs for more than two decades. If you are looking for a compassionate professional that can help you through the estate planning process, conduct a review of your existing estate plan, or if you would like additional information about our services, give us a call at (586) 464-1900 or complete our contact us form.