Greg: Hi, Steph. Nice to see you again.
Steph: Hello. How are you?
Greg: I’m doing well. I want to tell you about an interesting conversation I overheard recently with some of my friends. I guess we’re getting a little bit older. We all have kids now, and some of our kids are getting old enough that they can own their own property. Some of my friends were talking about putting their kids on the deed. That kind of scared me, but I wanted to know your opinion. That has to be a little bit different than a normal transaction, right? What goes into that? What should I be thinking about if that’s an option I want to pursue?
Steph: I think that adding a name to the deed can create a variety of tax and estate-planning problems, so it’s best done only after getting advice from an attorney and/or an accountant that’s familiar with that.
Steph: There’s about 6 issues that can come up. If you think about it, just adding your son to a deed, let’s just say, and then that son later gets into some legal trouble and gets a judgment. He gets in a bar brawl or something and he has a jury award of $200,000 against him, well, you might regret adding that son under your deed because now your property has a lien, if they get a judgment against him, for $200,000 that would attach to any property the son might own.
Greg: I can’t really raise my hand and say, “It wasn’t me, it was my son,” because I joined him to me when we put both our names on this deed?
Steph: You’ve got to make sure. Usually, that scenario, somebody wouldn’t add a risky person to their deed, in a sense. They would be, “Oh, well, nothing like that would ever happen,” and so they eliminate that issue first of all. If you don’t have that situation-
Greg: No offense to my son. I don’t expect him to get in trouble.
Steph: Yeah, that sort of thing. That doesn’t happen very often. The estate-planning mix-ups happens more often. Because the daughter lives here locally, they’ll put one of the daughters on the deed, thinking, “Well, she’ll be handling everything once I pass.”
Steph: What happens with that is that you’ve technically cut out your other 2 kids, so when Mom passes, that daughter would take the entire property and would say, “Well, that’s what Mom intended because I was taking care of Mom,” when that may not have been the intent of Mom at all. Mom’s intent was to give everything to all three children.
Greg: It might work well if the daughters get along, there’s no family arguing, but it sets up the stage where if the daughter on the deed wants to take the house, it’s basically hers?
Steph: That’s what I would call an estate-planning mix-up. Then you’ve got the gift tax hassle. When a name is added to a deed with nothing given in return, a gift has been made to the new co-owner of the home. The value of the gift depends on the value of the home and the number of people who own it, but it’s not hard to exceed the annual limit, which is about $14,000 currently for tax-free gifts, and that changes every year.
Greg: Let’s say if my aging, ailing father owns a $200,000 house that he’s paid off and he puts me on the deed, you’re saying that’s …?
Steph: You’ve just given your son a one-half undivided interest in your property.
Greg: $100,000, way over the individual-
Steph: Yeah, and $14,000 a year would be allowed every year. Every year, you’d have to give that gift until you got all the way up to that $100,000. Okay?
Steph: It’s not the end of the world, but if the home is especially valuable, the transfer can result in gift tax.
Greg: To the child placed on the deed.
Steph: Yeah, or occasionally estate taxes, so it’s a tax-
Greg: That’s some gift, right?
Steph: Yeah. It’s the gift that keeps on giving.
Greg: That’s right.
Steph: There’s another tax consequence that can occur. The scenario is that you would pay higher taxes, and here’s how it would work. Currently, the owner of a home can exclude approximately $250,000 gains from the sale of the home if it’s a principal residence. The figure is $500,000 for married co-owners. Add someone else to the deed, someone who doesn’t live there, they can’t use that home-sale gain exclusion and there might be a tax bill if the home is sold that wouldn’t be there if the person hadn’t been on the deed.
Greg: Okay. If a married couple owns a house and they add their child or friend or whoever, that third person …?
Steph: When we’re doing the closing, think of it. I’ve got to say, “Have you lived there? Have you used it for a business purpose? Have you rented it out?” I’ve got a third person in the room. The couple will say, “Oh, no, we lived there for 40 years,” but the child they added on as a one-third owner- …
Greg: Probably not.
Steph: … there could be a consequence. The portion of the proceeds that are allocated to that child when they sell are not excluded. Normally, if they had not added the child, it would be totally excluded.
Steph: Yeah. It’s an interesting … That’s just higher tax. Now there’s another higher tax. I call it higher-tax, part 2.
Greg: This is all good news so far. You’re scaring me.
Steph: Yeah. When you die, the basis of your home is stepped up. A home bought for $100,000 that is worth $300,000 at the date of their death gets a stepped-up basis of $300,000. When the heirs sell it, they only pay tax on any gains above the $300,000. If you sold it for $400,000, they’d have the basis of $300,000. They’d only be paying … The heirs would be paying the tax on the $100,000. If somebody else is on the deed, only part of the value gets stepped up, so this can result in capital gains taxes that wouldn’t be owed if that person had just been left off the deed.
Greg: Wow. That actually ties into one of the earlier ones you talked about where the heirs … Now you’re kind of complicating things even more.
Steph: Correct. Then the last one is a Medicaid mess-up. The scenario is an older parent who may need nursing home care and who would rely on Medicaid for funding should be especially careful with deed changes. The reason is the change can affect eligibility for Medicaid for a fixed time period after the change. The reason is that giving away assets is a method people use to qualify for Medicaid, so the program has a look-back period to see if the applicant has done that.
That deed change could have an impact on this. It’s something to check, and the specifics vary from state to state. In Kentucky I know there’s a look-back. Any time a client wants to add somebody to a deed, it’s a red flag. They need to seek a competent elder-care attorney, and there are some very good ones in town, because you don’t want to be the one who recommends and just puts them on a quitclaim deed, puts the kid on a deed, and then there’s this Medicaid issue that they now do not qualify.
Greg: Do not qualify. Right.
Steph: It’s within the look-back period, so it doesn’t qualify. It’s very important because of Medicaid to make sure before you add a child onto a deed that it’s reviewed by a competent elder-care attorney.
Greg: These all seem like good reasons to think about not putting a child or an extra person on a deed. Should it just be done generally less than people do it, or there are some good reasons to do it? Or it’s just think it through before you do it and as long as you know what you’re getting into, then it’s perfectly fine?
Steph: No. I would suggest doing what people do and get a will. If you own property and you have children, unless you want it to just … If you do nothing, you do not have a will, it’ll go per the intestate laws in Kentucky. Not a good thing. It costs you more to probate, shipped to an appointed administrator. The court has to, in a sense, oversee the probate. What you want to do is if you have a piece of property, you’re older, you’re thinking about, “Oh, I want to make sure my kids get my property,” get a will.
Greg: Okay. There are ways to handle this besides-
Steph: There’s standard ways to handle this. See an estate attorney. You can contact Horne Title, contact Stephanie Horne, Attorney. I do some simple wills. We also have a network of wonderful elder-care-law attorneys that can deal with the very detailed Medicaid issues, mess-ups that can occur. We can also refer … Trusts are very good if you have a log of assets, but getting a simple will is where it’s at. It’s just really important to make sure you have a simple will in place. If you have more assets or complex issues that relate to Medicaid, we will refer you to an attorney that can handle that.
Greg: Okay. I really appreciate you let me stop in and sit down for an education class every couple of weeks. It’s really quite interesting.
Steph: Thanks a lot.
Greg: Talk to you soon.