Many parents, especially the older ones, assume it is wise to add a child’s name to their house deed in case something should happen to them. On the contrary, it is probably the worst thing that can be done. By doing so, the parent creates a host of problems.
- Gift Tax Issue – For gift tax purposes, adding a child to the title constitutes a taxable gift of the ownership interest in the home to the child. If the value of that gift exceeds the annual gift tax exemption ($13,000 for 2011), then a gift tax return must be filed. No gift tax will probably be due if the total of the current and all former gifts is less than $1,000,000, since that is the current lifetime gift exemption for an individual. (The limit increases to $5,000,000 for 2011 and 2012.) However, the law requires that the return be filed so that the IRS can track all of the gifts in excess of the annual exemption that an individual makes during his or her lifetime.
- Home Sale Gain Exclusion – Current tax law allows homeowners who meet certain ownership and occupancy requirements to exclude from taxable income up to $250,000 ($500,000 for most married couples) of home sale gain. Thus, if a home deeded to a child is subsequently sold, the home gain exclusion will not apply to the child’s portion unless the child lived in the home for two of the prior five years. This can result in a substantial tax liability, depending upon the value of the home and the child’s ownership portion. Should the parent place the entire property in the child’s name, then generally none of the gain would be excludable and even worse, the parent is at the mercy of the child should the child decide to sell the home. There is no guarantee that the child will continue to care for the parent.
- Debt Liability – Since property is subject to the debts of its owners, and if a child is a part owner, a debtor might file a lien on the property for the child’s debts.
- Medicaid – Gifting the home to a child could, under certain circumstances, be considered a gift for Medicaid qualification purposes, making the parent ineligible for Medicaid benefits in the event of a long-term health crisis.
There are additional issues to consider as well, including the tax ramification to the child based upon the home being a gift or ultimately inherited. Please call us at (989) 772-1209 or email us to discuss these issues in detail before placing your home in any of your children’s names.