Do not Add your Adult Children as Co-Owners of Your House—There are Better Ways!

For most people, their home is their most valuable asset, and they wish to devise it to their heirs without an expensive court process. So, they do what they do with their bank accounts—they figure out how to add their child as a co-owner. However, for many reasons (even more than the list of reasons as to why they shouldn’t add their child to their bank accounts) this is usually not a good idea. There are safer and better alternatives.

First, many elderly individuals have owned their house for decades and have amassed two significant tax benefits from such long-term ownership, both of which are compromised by adding a child to the deed. When you purchase a home, your tax basis for capital gains purposes is the purchase price of that home. If you own that home until you die and your children inherit it after your death, their tax basis is the value of the property as of date of death of the last surviving owner. This is known as a step-up in basis. If you gift it to them during your own lifetimes, they do not receive that step-up in basis and may have to pay capital gains taxes when they sell the property. Additionally, in Florida, part of our homestead benefit includes the “save our homes” cap which ensures that our property taxes do not go up more than 3% annually. We can port this benefit to other properties that we purchase in the future. If you add your children to your property as owners, the value of the property for tax purposes can be reassessed, and your taxes could increase unexpectedly.

Second, when you add a child as an owner, they do not automatically get homestead protection. So, your home becomes subject to their creditors. And further still, since you no longer own the property independently, you cannot refinance, sell, or otherwise materially alter the property without your child’s written consent.

Third, adding a child to the deed of a home without a payment of fair market value toward their share is considered a gift. So, on top of significant tax consequences and loss of control, the owner will not be able to receive Medicaid benefits for a period of five (5) years from the date of that transfer, resulting in the need to privately pay for care.

However, in Florida, we have two planning alternatives that allow owners to pass their property to their children or other heirs after death without a court proceeding while maintaining all the benefits of ownership during their lifetimes and not running afoul of Medicaid’s five year lookback period.

The enhanced life estate deed, or ladybird deed as it is also known, allows owners to maintain full control during their lifetime. It allows the owners to place a beneficiary on the face of the deed so that the property passes to the beneficiary immediately upon the death of the last life tenant. It also meets the objective of avoiding probate while preserving the child’s step up in basis and the original owner’s save our homes cap.

Finally, if the owner chooses to protect their assets by deeding their home into a revocable trust, they can retain even more control over the property, while also avoiding probate, preserving the step up in basis, and the save our homes cap.

These options are complex and should be considered as part of a broader estate planning discussion. Please contact us today to schedule a consultation to discuss these options, so that we can help you enjoy a life well-planned.