Have you been told that you can avoid probate by adding your child to your home’s title? Although holding property in joint tenancy with your child will result in a direct transfer to that child upon your death (thus avoiding probate), here are three reasons why you shouldn’t place your child on your property’s title.
(1) Adding a child as a joint tenant on your property will trigger a property tax reassessment. The taxable value of real estate is calculated pursuant to its “base year value,” which is either the property’s value at the time of purchase, or its value at the time of its most recent change in ownership—whichever is later. Adding your child to your home’s title as a joint tenant constitutes a change in ownership which will result in a reassessment of your home’s value and a property tax increase.
(2) Adding a child as a joint tenant on your property may result in avoidable capital gains taxes. Let’s assume that you bought your home for $150,000 and its current value is $850,000. If you were to sell your home, there would be a $700,000 capital gain. However, if you leave that same property to your child in trust, your child will inherit that property at the “stepped-up” date-of-death value of $850,000. If your child then decides to sell the inherited property, he or she will not be subject to capital gains taxes because the property’s base value will be “stepped-up” from $250,000 to $850,000.
(3) Adding your child as a joint tenant on your property is a liability. Adding your child to your property’s title gives that child an ownership interest in your home; and because of this ownership interest, your home (or its value) can be used to secure a loan, satisfy a judgement, repay a creditor, or be distributed to a former son or daughter-in-law in a dissolution proceeding.
For the foregoing three reasons, the most efficient way to avoid probate and transfer your property to your child is through the creation of a trust.