Pros & cons: Co-ownership of your home
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A common question heard by advisors as clients age is, “Should I add my adult child’s name to the title of my home?” While adding someone to the title of a home is a strategy, there are several downsides to keep in mind and alternative methods to consider.
Pros of Adding Someone to Home Title
Including another person(s) on the title of a home means legally adding owners to the property. If the home is titled joint with rights of survivorship (JTWROS) when one owner passes away, the surviving owner will automatically become the sole owner of said property.
In this scenario, the home efficiently transfers to the surviving owner and avoids probate proceedings. Probate involves a court process to identify rightful beneficiaries of property when someone dies. Probate can lengthen the estate distribution process and become costly; therefore, many try to avoid probate if possible.
For some scenarios, this estate planning method works well, particularly for married couples or domestic partners. For purposes of passing assets to the next generation, however, there are disadvantages.
Cons of Adding Someone to Home Title
Adding another person to the title means losing some sense of control, whether partial or full, over the home. In most cases, people want to add trusted adult children, other family members, or friends as either co-owners or sole owners of a home. However, disputes can and do happen with trusted individuals. If one owner decides to change the property or sell, the co- or original owner either agrees or, if not, must deal with the disagreement. Adding another owner means making property decisions together versus alone.
Loss of control can lead to other precarious scenarios. Imagine the co- or new owner files for bankruptcy, is involved in a lawsuit, or files for divorce. The home could be an available resource subject to liens, foreclosure, or asset division. There is also the possibility the new owner dies before the original owner. In this scenario (while somewhat unlikely if naming an adult child or younger family member as owner), their share of the home could pass to their beneficiaries, depending on how the home is legally titled.
In addition to the loss of control, adding someone to the home title likely means making a taxable gift. The maximum amount an individual can give to another individual without having to file a gift tax return and reducing a lifetime gift tax exclusion amount is $17,000 in 2023. Typically, if you are adding someone as a co-owner or giving a home entirely to another individual, the value of that gift will be more than $17,000.
Filing a gift tax return might not be a big deal for some, and most individuals will never maximize the current lifetime gift tax exemption amount of $12.92 million. However, the gift does technically need to be documented for tax purposes.
Speaking of gifts, transferring partial or full ownership of an asset can affect future Medicaid eligibility. If there’s a possibility of needing assisted living or long-term care soon and the ability to pay for ongoing care is in question, making a large gift to a family member or friend can jeopardize Medicaid benefits for a period in which benefits would have otherwise been available.
There is currently a five-year lookback period for qualification for Medicaid benefits. For example, add your adult child as the sole owner of your home (valued at $350,000) in year one and need to move to an assisted living facility in year four. You might not be immediately eligible for Medicaid since the gift was made within the last five years.
Income tax consequences should also be a consideration. For example, you purchased your home for $100,000 over 20 years ago, and your cost basis is $100,000. The current value of the home is $350,000. If you remain the sole owner of the home until your death and the home passes to your daughter as an heir, your daughter receives a step-up in cost basis, which means her basis is the current value of the home ($350,000).
When your daughter goes to sell your home after your passing, she would likely pay no taxes on the sale because she received the step-up in cost basis.
Now let’s say you remove yourself as owner before your death and add your daughter as sole owner to pass this asset to her at your death easily. Your daughter does not receive the step-up in cost basis as described above because you are gifting her the asset before your passing. When your daughter sells the asset, she will be faced with a tax bill for the capital gains incurred due to the lower basis she has in the home.
Summary
Given the number of cons, seeking alternative methods to transfer a home to beneficiaries efficiently is suggested. If probate avoidance is a goal, a revocable trust or a transfer on death deed should be considered. Ultimately, getting help from an estate planning attorney to ensure estate distribution goals are met is highly recommended.
Abby VanDerHeyden, CFP, is a Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Abby at AVanDerHeyden@bedelfinancial.com.