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One common question we often get is whether to add a child to a client’s title for their property.
Usually, this property is their Florida homestead. Most clients think this is a wise decision because if the children are on the title then the property will not pass through probate. While it is true that adding children to your title can avoid probate, adding children to your title can cause these serious issues:
When you add children to your property’s title, your children receive a transferred basis for the value of your property. This is just a fancy way of saying that your children receive the property at the value that you paid for the property. If the property is then sold before you pass, your children may own capital gains taxes on the share of the basis that they received from you in the property.
Let’s say you paid $50,000 for your homestead property back in 1992. Your homestead is now worth $250,000 in 2019. If you add your child onto the title to your property and then decide to sell your property, your child would have a cost basis in the property of $25,000 and would have to pay capital gains taxes on the difference between $125,000 and $25,000, which would be quite a hefty tax bill.
If you don’t add your children to your title and your property passes through your Will, your Trust, or a Lady Bird Deed, then your children receive a step-up in basis for tax purposes. This means the house you paid $50,000 for in 1992 and now is worth $250,000 will pass to your children with a value of $250,000. If they then sell the property for $250,000 there will be no capital gains taxes owed.
Some parents will gift their entire property to their children during their life thinking that it will avoid probate. Little do they know that for tax purposes they are depriving their children of receiving any step-up in basis on the property. Big mistake.
When you add children to your property’s title—regardless of whether the property is your homestead or a rental property—you are now opening up your property to any of your child’s creditors. Creditors include financial lawsuits, personal injury suits, and divorces.
Why is this?
Well when you add children to your title, you now co-own the property with your children as Tenants in Common or Joint Tenants with Right of Survivorship. Now that you co-own the property you are presumed to have an equal co-ownership in the property unless the deed states otherwise (e.g. you add your son to your title as Tenants in Common, you both now own the property 50% each).
When you own the property completely in your name and the property is your homestead, your property has unlimited protection against most creditors. If the property is co-owned with your child and the child does not live in the property, then a portion of your property is now no longer considered a completely protected homestead, and half of your property is susceptible to your children’s creditors.
This means that if your child is sued the creditor can partition and sell your property.
You add your son onto your homestead property’s title as a 50% owner. Your son decides to have one too many drinks at a company Christmas party and drives home. He gets into an accident with the son of a prominent personal injury attorney in your city. The prominent personal injury attorney sues your son for $500,000, which is well beyond what your son has financially.
By adding your son’s name to your homestead property title as 50% owner, 50% of your property is now completely susceptible to your son’s lawsuit. If your son does not have the assets to satisfy the $500,000 judgement, the personal injury attorney can take over your son’s interest in your property and force a sale of your property.
Florida homestead gives you unlimited protection against the majority of creditors. By keeping your homestead property solely in your name, you not only protect the property during your lifetime, but your children will also receive the same homestead protections when they inherit the property.
When you add children to your property’s title you are giving them a gift. A gift is the transfer of property by one individual to another while receiving nothing, or less than full value, in return.
Why is this?
Well when you add your child onto your property’s title you are giving them an ownership interest in your asset—your property—and you are not receiving fair market value compensation in return.
Because you are not receiving fair market value compensation in return you are obligated under the IRS code to fill out a gift tax return for the tax year you made the transfer for any amount above $15,000.
Let’s say you add your son to your property’s title. Your house is worth $200,000. You give him an equal share in the property. Your son does not give you any money for being added to the title. Half of the property is worth $100,000 – considerably more than $15,000.
So, as far as the IRS is concerned, you have made a large gift to your son. Under the IRS code, you are required to fill out a tax return for the year you added your son onto your property’s title.
For the vast majority of Americans, the answer is no. The gift tax is directly tied to the estate tax, which means that you can gift away $11.4 million dollars (2019) during your lifetime and you will owe no estate taxes.
However, the estate tax can always change depending on which party is in office, so always be mindful. It wasn’t too long ago that the estate tax exemption was $675,000 (2001).
As we talked about before, once you add your child onto your property’s title you now jointly own the property with your child. This means that if you want to sell the property or significantly update the property (e.g. update the kitchen), you will need their permission.
This can cause serious issues down the road if you want to sell your property for a specific reason but your child disagrees with you.
Joan added her daughter Delilah to her property in 2005 since she did not want the property to go through probate. After 14 years, Joan now wants to sell the property since it is too much for her to maintain on her own. Delilah does not want her mother to sell the property because she really likes the location and wants to keep the property after her mom passes.
If Joan can’t get Delilah to agree to sell the property, then Joan will have to hire an attorney to force a sale of the property, which is both time consuming and very expensive.
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