If you have children, grandchildren, or any younger relatives you care about, you've likely thought about the best ways to build generational wealth and continue the family legacy. Perhaps you've also heard that if you leave property to your heirs in a will, it will have to go through probate in New York and that it's a time-consuming and costly process.
Someone might have told you that one option is to add your children to the deed to your house or transfer your property to them while you're still alive. But is this a good decision?
Some well-meaning “experts” who advise the general public might say yes. And while it's true there may be a few potential advantages to doing so; there are several reasons why it might be a very bad idea—for you and the loved one you're trying to help. Adding an adult child or relative to your property deed is significant, and you must understand all the risks.
Here are six very serious possibilities that could result from adding someone to the deed of your home or other property deed.
1. Gift Tax Implications
You might create unintended gift tax implications. By law, any gift exceeding a certain amount (as of 2023, $17,000 per recipient per year) must be reported to the IRS, potentially triggering a gift tax liability. Adding a relative to your deed could be considered a gift, and this could result in higher taxes that you need to pay.
2. Vulnerability to Creditors
Your child's financial problems could become your problems. If they have creditors, those creditors could lay claim to your property to satisfy these debts. And even if they have squeaky clean credit, a great job, and responsible spending habits now, this may not always be the case, and if they experience financial challenges in the future, that could be a huge problem for you down the road and put your property ownership at risk.
3. Cost Basis
You could expose your child to big capital gains taxes. When you add your child to the deed, they inherit your original cost basis and might owe significant capital gains taxes if they sell the property later. In contrast, if they inherit the property after your death, the basis is "stepped up" to the property's value at the time of your death, potentially reducing capital gains tax if they sell.
Put simply, if your child is added to the deed while you're alive, the price/value of the home when YOU bought it is used to determine capital gains taxes, whereas if they acquire the property after your death, the current market value at that time is what's used, meaning they'll pay significantly more in capital gains taxes if they ever choose to sell the property.
4. Financial Aid Eligibility
Your child's eligibility for financial aid might be negatively affected. If your child or their child is planning on attending college, owning a part or all of your property could inflate their assets and impact the financial aid they may receive.
5. Loss of Control
You won't have total control over what to do with your home. Selling your property is no longer your sole decision once someone else is on the deed. Since your child has a stake in the property, they must agree to any sale and could potentially halt or delay the process if they don't want to sell. And just because you agree with each other about what to do with the property now, there's no guarantee one of you won't change your mind in the future.
6. Family Conflict
You might inadvertently cause resentment and arguments. Life is hard enough without stirring up unnecessary family conflict. If you have more than one child but only add one to the deed, this could create hard feelings and disputes among siblings. You could have the same problem with grandchildren or other relatives. If maintaining harmony is important to you, think carefully before throwing a monkey wrench like this into your family dynamic.
As you can see, adding one or more children or relatives to your property deed might create more problems than it solves and may not be in your best interest—or theirs. Maybe you're acutely concerned about making sure your home goes to the person or people you wish to inherit it, or you're worried about trying to lower your tax burden, or you want to take steps now to ensure Medicaid eligibility down the road. Whatever your reasons or concerns, think twice. Transferring property to loved ones is rarely the smartest solution.
A Better Option for New York Families
A better alternative may be to have a clear will or trust that outlines your wishes for the property after your death. This way, you maintain control of your property during your lifetime, and you ensure a smooth transition of assets afterward.
General advice is not one-size-fits-all advice! The details of your specific situation matter a lot, and that's why you should seek professional legal and financial guidance from an expert who cares about your personal circumstances and goals and will listen to understand before giving you advice.
The New York estate planning attorneys at The Browne Firm want you to feel informed and comfortable before taking any action that will affect you and your family financially, legally, and emotionally. Protecting your assets and family dynamic is equally important, so please don't make decisions without our compassionate guidance.
Call us today or schedule a free consultation. We're here to help you protect what you've worked so hard to build.