06/15/2022
The many reasons you do not add a family member to a Deed…a “Poor Man’s Will” costs much more than it saves….
There are a few things to consider any time you consider adding someone to the deed to your property.
1. Capital gains liability: Compare your initial purchase price amount, a Zillow fair market value guestimate and your SDAT tax assessment to get an idea of possible capital gains tax exposure. For this example, I will use a purchase price of $50,000 in 1969, sale price in 2016 of $777,000:
a) When you add someone to a deed, they inherit your basis ( [purchase price) which was $50,000 in 1969. If your mom/dad/sibling outlived you, the house would go through that person’s estate and not necessarily to your children as part of your estate. AND, there would be capital gains tax on the difference between 50,000 and the value as of your death or the date your relative sold it (15-20%) for example: the difference between $50,000 and $777,000 =$727,000 that could be taxed at 15% ($109,050). If you have siblings or mom/dad/sibling has a spouse, they are entitled to make an “elective” share claim against mom/dad/sibling’s estate which would be against the house to the detriment of your children
2. Judgements of other owners attach to your property creating “cloud” on title: If the person you add to title gets sued for anything, a judgement from a car accident, an unpaid credit card…. it can attach as a lien to your property and the property cannot be sold or refinanced until the judgment is paid in full as it is a “cloud” on the title to the house
3. Gift Tax implications, need for returns: If you give someone a gift in excess of $16,000 per year, you have to file a gift tax return with the IRS, adding mom/dad/sibling to the deed would be deemed a gift. It would likely fall under your lifetime gift exemption, but you would still need to file the return the year you added mom/dad/sibling to the deed
4. Possibility of limitations on freedom to sell or refinance, possible disability of other owner: If you ever wanted to sell or refinance, you would need for your mom/dad/sibling to cooperate and do it with you…if they didn’t want to cooperate or couldn’t cooperate due to a temporary or permanent disability, you would not be able to proceed…so at a minimum, you and your mom/dad/sibling should have financial powers of attorney referencing the address of the property specifically if you do add mom/dad/sibling on the deed.
5. Non resident seller tax liability: If the person you added to the deed lives out of state, there may be “nonresident seller withholding tax” liability of 8% on the proceeds of sale.
6. Medicaid qualification: If the subject property is titled in someone’s name, it will likely be deemed as part of their assets if they are ever trying to qualify for Medicaid and they will be disqualified as a result until it is liquidated and funds are “spent down”.
7. Bankruptcy: If the subject property is titled in someone’s name, it will likely be deemed as part of their assets if they are ever trying to file for bankruptcy and could limit their bankruptcy options and limit your ability to sell or refinance your property.
8. Divorce: If the subject property is titled in someone’s name, it may be deemed as part of their marital assets if they are ever going through a divorce, and could create problems for both of you and certainly limit your ability to sell or refinance your property.
Adding a family member to a deed is sometimes called a “poor man’s will”, but the risks and costs of doing it far exceed the savings, so I do not recommend it.
If you are considering adding someone to your deed with the good intentions of protecting them or providing for them, you should have a will or trust drawn up, leaving the house or the right to live there to your mom/dad/sibling so long as he or she is able or wishes to live there, should you predecease him or her (assuming he or she or your estate can pay the mortgage and expenses to do so) and if he or she didn’t survive you, then alternatively leave to your children in trust, and you would to name a responsible Trustee to either keep it and manage it for them until they attain the age that you would want them to receive their shares of your estate, free of trust or the Trustee could sell it and manage the children’s funds for them until the age you direct. In the case of divorced persons, the ex-spouse/parent of the minor children will normally be the guardian of the person of those minor children by default if he or she survives you, but you do get to choose who is guardian of any assets you leave behind should you pass while your children are minors. If you do not name a guardian of the assets for your minor children, then the law decides for you….and provides that whoever has custody of them will be in charge of the assets as well. You may also name alternate guardians of person and property for your minor children should their other parent predecease you.
Bottom line, you do not want to put your mother/father/sibling on a deed. You can provide for her, him and your children with a well written will and/or trust; which would also allow you to address the issues of guardianship of your children as well. It would be a good idea to discuss the “what if’s” with your mother/father/sibling to determine if he or she could stay in the house if you passed unexpectedly and the children were still minors… perhaps you have or could get life insurance naming your mother/father/sibling as primary beneficiary and the children as secondary beneficiaries (with proper trustees/guardians named) to make certain it was possible for them to stay in the home.
Never consider what appears to be a very simple act like adding someone to a deed in a vacuum, without consulting a CPA and an attorney be certain you are fully informed as to the many possible unintended legal and tax consequences.
My background is heavily concentrated in estate planning and real estate law. I am happy to consult with you should you wish to discuss this commentary and alternatives to properly accomplish your goals.
Lynn Caudle Boynton, Esquire,
Clifford, Debelius & Boynton, Chartered
June 15, 2022
