Many people want to spare their children the time and expense of probate court after they die. Most people are aware that they cannot simply fill out a “beneficiary form” for real estate, like they can for a bank account, so they decide, “I’ll do a deed adding my child(ren) to my deed. That way they’ll automatically own it when I die, and probate court will be avoided!” I tell my clients that there are pros and cons to everything, and that includes the various estate planning techniques. I believe the cons (or at least, the “potential cons”) outweigh the benefits of adding children to your deed.
First, when folks are contemplating adding their children to their deed and thus avoiding probate, they are frequently motivated to save legal expenses. They often use forms that they purchase in office supply stores or that they download off the internet. Deeds are state law specific, so people sometimes obtain a form deed that does not comply with Florida deed requirements, and they unwittingly record a technically deficient or invalid deed. The clerks at the courthouse are not lawyers and their job is to record what you hand them, not give legal advice on the correctness of an instrument presented to them for recording. Often, the problem is not caught until the parent dies and the children try to sell the property – then they face probate at a minimum, but perhaps even more complicated and expensive proceedings, such as a quiet title action. Even if the form deed has the proper execution requirements, I have done probate work for children whose parent did not use the technical language needed to make the home “joint with right of survivorship.” Thus, the children still had to probate the deceased parent’s share of the property.
Second, even if the deed is correct and the required survivorship language is in place to avoid probate, there are several legal issues that amount to cons. If your child is on the title to your home or any other parcel, then their share of your property may be subject to their creditor claims, their bankruptcy claims, IRS claims, and their spouse’s claims in the event they get divorced. As I discussed in my December 14th, 2018 article, The Puzzle of Blended Families and Estate Planning, we have a high divorce rate in the United States, so this must be considered before adding children to your deeds. Remember, once your children are on the deed, they are co-owners with you, owning a certain percentage(s) of the property, depending upon how the deed is written. You cannot sell the property without their joinder (short of an action for partition), and when sold, they are legally entitled to their share of the proceeds!
Third, even if none of the issues discussed above become a problem, there are negative capital gains tax implications to consider. If you put your children on your deed while you are alive (inter vivos), then you typically have made a gift for the value of their new share. Initially, you should file a 709 gift tax return for any value that exceeds the annual gift tax exclusion – currently $15,000 per person. Because you have transferred the share in your property inter vivos, your children do not receive a step-up in basis for that share when you die, and if they then sell the property, their share of the property that has appreciated in value from when you first purchased it, subject to potential modifications, will be subject to capital gains taxation, which for most people would be 15%, but can be as high as 20%.
For example, say John Smith bought his home in 2000 for $150,000 (original cost basis). Today, the home is worth $350,000 and he has no mortgage. He wants his daughter, Jane Doe, to avoid probate court when he dies, so he executes a legally correct (hopefully!) deed that makes the property joint with Jane. John has effectively made a gift to Jane of one-half the value of the property: $175,000. John must file a 709 gift tax return with the IRS because the gift is greater than $15,000, but fortunately, because of the large unified credit, no gift taxes will be owed. However, because the gift is inter vivos, Jane’s half of the property receives one-half of John’s original cost basis, thus $75,000. John dies in a future year when the property is worth $450,000. Jane sells the property shortly after her father’s death. Unless the tax rules are different in that future year, then only her father’s one-half of the property will get a step-up in basis, and Jane’s one-half will be subject to capital gains tax: One-half of the sales proceeds ($225,000) less her “carried-over” basis in her one-half ($75,000) means that $150,000 of the proceeds will be taxed at either 15% or 20% (if Jane has a high income). That will result in $22,500 to $30,000 in capital gains taxes to Jane!
Putting your children on your deed can actually cost much more than you think, and can put your ownership and rights in the property at risk – significant cons. Fortunately, there are various legal techniques in Florida that can 1: avoid probate, 2: avoid title, ownership and control issues, as well as liability exposures associated with putting children on your deed(s) as co- owners, and 3: avoid capital gains taxes for your children after you pass. This is why you need a comprehensive estate plan! An experienced estate planning attorney can ensure your wishes are followed with respect to your real estate (and other assets), without the costs and risks outlined above.
Shaun W. Wiedrick is an Estate Planning and Elder Law attorney with 20 years of experience. His office, Shaun W. Wiedrick, P.A., is located in The Royal Palm Financial Center, at 759 SW Federal Hwy., Suite 212, Stuart, FL 34994. Contact his assistant at: kate.wiedricklaw@att.net or call (772) 463-4443.
