Many people over the years have been told that adding their children or a friend to a deed to avoid the costs of having a will or dealing with probate. While this is true with respect to the house, generally, it causes a dozen or so other problems that are not considered at the time. In this blog post, I will focus on the six biggest risks associated with joint property ownership.
Joint Ownership = Bad Idea
- Your Home But Not Your House. By adding a child, grandchild or friend to the home’s deed, create joint ownership, which means you can no longer do as you wish with your home without their approval. It may be your home, but it is now their house, too. While they cannot force you to sell the property, you cannot force them to let you sell it either. Need a home improvement loan? You will have to get the kids’ permission first.
- Inheriting a Law Suit. Do you want your kids to sell the house after you are gone to split the equity? Chances are that if they are joint owners, one of them will just as soon live there as get half the proceeds from the sale. Unless they all agree to a sale (including price, real estate agent, timing, etc.) an action for partition in the Circuit Court will be required to force the sale, which is very costly both financially and in strained relationships.
- Gift of Collectibility. If your child has creditor problems or goes through divorce proceedings, your child’s creditors or spouse may go after your child’s share of the house if you are joint owners of it. Your house could also be targeted because of an auto accident or other catastrophic incident that your child is held responsible for. While your child may never benefit from your generosity, their creditors or former spouse might.
- Ask Not What Your Country Can Do For You. Adding someone to your deed during your lifetime is also a gift to the government in the form of increased tax revenue. First, if you sell your home and someone is a joint owner on the deed but doesn’t live there with you, the home-sale capital gain exclusion may not be available to you. Also, there are typically no capital gains taxes due on the sale of your home by your heirs after you die. However, if you add someone else to your deed, then they will have to pay capital gains taxes that would not be owed if they were not on the deed. While your co-owner might not be too happy about the extra taxes, your government thanks you.
- Homelessness as a Long-term Care Strategy. If you or one of your joint owners needs nursing home care and require Medicaid to pay for it, having non-spouse co-owners of your home would most likely make you ineligible for Medicaid and might leave you no way to pay for your care without selling the house. See my prior blog post on Estate Recovery, too.
- Extra Tax Returns Make For Happy Accountants. Simply adding a name to a deed as a joint owner with nothing given to you in return is generally considered a gift for gift tax purposes. In most instances, a gift tax return will be required, as the value of the gift will be more than the annual gift exclusion amount. In addition to the added fees to your accountant, you will also likely need to get an appraisal of the value of the real estate interest you gave away. Some accountants do appraisals, too, so perhaps this could be a double bonus for your accountant.
There are many other inexpensive ways of meeting your goals without incurring any of the complications of making others joint tenants with full rights of survivorship or other forms of joint ownership of your home. Often using a different type of deed, known as a “Lady Bird” deed will be enough to accomplish this. If your home is owned jointly or if you are considering adding someone to your deed, before doing anything, please call us or email us to schedule a free initial consultation to learn how we can help ensure that you are not giving up more than you are gaining in the transaction.