Why not to put your kids on your Title / Deed for your property:
I know for a lot of people that tends to be how they’ve done will/estate planning, or how they want to avoid probate. I don’t recommend it for a lot of different reasons because it causes a lot more problems than it solves.
If you ever try to sell that property, guess who gets to decide in every, single, Sale decision?
That means which REALTOR® do you hire? How much are you willing to pay them?
What price you want to list a property for?
Do you want to do staging?
Now we got an offer and all of these people have to review the offer and we all have to agree to every date, every term, every single fee of who’s paying what in the offer. That’s over 250 items here in Colorado based on our current contract!
Let’s say you have 3 kids and both parents are still alive. Getting 5 adults to agree on anything is nearly impossible, nonetheless, when it’s something as emotional is selling the childhood home!
Ya’ll, it gets messy!
Let’s say, one of the kids says, ” No, I don’t want to sell the house. I want to get that house because that’s my childhood home.”
Well, maybe Mom and Dad wanted to sell because they need the money to move to a retirement community, or move somewhere cheaper and hire live-in care, or downsize.
Don’t make things any harder than they’re probably already going to be.
Maybe one of those three kids is not the most responsible, but you love them because they’re your child of course…
And you want them to get an equal share, so you put them on the title. Maybe they “just haven’t found their way” and they haven’t paid their income tax for a few years, but they didn’t tell you that. So the IRS files a tax lien on your house because they are on title, and the house is a lienable asset. So Mom and/or Dad can now be foreclosed on because one of their kids hasn’t paid their own income taxes.
Don’t lose your house to the IRS because your kids didn’t pay their taxes and you put them on the title!
Not to mention, if they get sued, if they get in a car accident, can’t pay personal injury lawyers, you’re opening opening the property up just to have someone else go after them for it!
Don’t open yourself up to that kind of liability.
Your Title policy likely won’t cover the kids you Quitclaimed onto your Deed! And it may even void the coverage you had! I’m going to speak to the state of Colorado, but let’s say you purchased the property with a title policy and you had a special warranty deed. Then you go down to the court and record a quit claim deed to add new your children on. You have now lowered the warranty of your deed level from a special warranty, which has a level of warranty and other things that go along with it to a quit claim warranty, which carries no warranties. So you’re not putting any guarantees with the deed. What it means is that Title Policy that you received when you purchased the property is no longer valid since you changed Chain of Title and other ownership information without their review. And maybe one day, you’re having an ownership issue because you own mineral rights and someone’s trying to take that so you reach out to the Title Company and they say, “Yeah, you changed your Deed so your coverage is no longer valid. They’re not part of your title insurance policy. All you had to do was call us and ask to add somebody and we could have just charged a nominal endorsement fee to update your policy to add that person. But because you didn’t, your Title Insurance policy is voided.”
That’s a big problem. Especially if you ever have a title issue, which the more people you add to title, the better chance you’ll have a title issue.
Capital Gains Tax
This gets really messy depending on investment vs. personal, etc. But if you were doing this to avoid probate, because people think that probate is expensive and needs attorneys, dealing with court, and all this other stuff, so they think “I just don’t want to deal with that. I don’t want my kids to have to deal with that.”
So, let’s say you bought this house in 1965, and you put all your kids on Title at some point. You pass so they avoid probate…
Now, those kids want to sell that house and it has appreciated significantly in that period of time. They are now paying capital gains, because it’s not their primary residence.
They don’t get to get claim that tax exemption and they are an owner since they are on Title. They could now be paying capital gains on the entire appreciation because they’re on title and they didn’t pass.
There are certain things that “adjust the basis” which is essentially the base level that the capital gain is calculated from. So the longer ago you purchased it, chances are the lower the basis is, right? You do some Capital Improvements, okay, you can adjust it down a little bit for the money, you spent, but then you go to sell it and let’s say it’s appreciated $500k in the last 50 years.
Well when you pass and there are no remaining survivors owning the property, some estate planning methods (probate, trusts, beneficiary deeds, etc) will trigger an adjustment to the basis that is used to calculate the capital gain! Then you’re not paying capital gains tax on all of that appreciation, only the money that you’ve made from the market value of the property at the time of owner’s death versus when you sell it.
For a lot of people that is hundreds of thousands of dollars of capital gains tax they won’t have to pay by keeping your kids off the title and handling dispersion of assets a different way, via probate, a trust, a beneficiary deed, etc.
CONSULT AN ESTATE PLANNING ATTORNEY in your state! It’s worth the money, I promise.