Should I Add my Children to the Deed of my House?

This may come as a surprise, but I often advise against adding a child to the deed of the house or a checking account. While this approach may protect your home from nursing home costs, there can be a multitude of unintended consequences. Let’s take a look at these issues and explore an alternative solution.

Unintended Consequences:

• Liability Risk – When you add your child to the deed of the house, they become the co–owner of the house or checking account. This means that if your child gets divorced, the equity of your home or value of your checking account can be included in the divorce proceedings. Additionally, if your child declares bankruptcy, your home equity or bank account can be included in the bankruptcy proceedings; if your child runs into a tax situation, the IRS could place a tax lien on your home; or, if your child were to get sued, your house could be included in the lawsuit.

• Unintended Inheritance – In the unforeseen situation that your child predeceases you, the equity of your house may transfer to someone other than you. Or at best, if you re-inherit your property, you will likely have to pay an inheritance tax to the state of Pennsylvania for 4.5% - even though it’s your house.

• Taxes – Adding your child to the deed of your house is considered a gift, which will result in filing a gift tax return on form 709. Typically, this will avoid Pennsylvania Inheritance Tax (4.5%) on the portion of the house they own. Assuming they own half the house, when you pass away, they will have to pay Capital Gains tax on the remaining portion. Say you purchased your house for $100,000 in the 70s. In 2023, your house may be valued at $500,000. Your child would inherit a cost basis of $50,000 (half of the initial purchase price). They would need to pay capital gains on $200,000 (half the value of the house, less the cost basis) which is $30,000 in taxes, assuming a 15% capital gains rate.

Alternative Solution:

Most estate planning attorneys can draft an estate plan for a few hundred dollars, up to $1,500 for more complex cases. Naming your child as power-of-attorney allows them to help pay bills on your behalf, sign documents for you, and assist with your financial affairs. But legally, they do not own any of your assets. This is particularly useful for limiting your liability. If your son or daughter runs into financial trouble, gets divorced or sued, your assets cannot be included in the legal proceedings.

Additionally, your updated estate plan will make certain your loved ones inherit your assets. Let’s assume your child inherits your $500,000 home, because they get a stepped-up basis at the time of your death, they have zero capital gains and will only owe the Pennsylvania Inheritance Tax. At 4.5% on a $500,000 home, that is $22,500. That’s a $7,500 tax savings compared to the earlier example. While paying taxes is never fun, I often advise my clients in a way that would allow them to pay a reduced rate if they can.

Bryson J. Roof, CFP , is a financial advisor at Fort Pitt Capitol Group in Harrisburg, and has been quoted nationally in various finance publications including CNBC, U.S. News & World Report, and Barron’s.