Real Estate Deeds
As a homeowner ages, a common legal question is: “Should I add someone to my real estate deed?” The main reason homeowners add heirs to the deed prior to death is to avoid probate – a court-supervised process of determining the value of the decedent’s final bills and estate taxes which are taken out before an inheritance is given to the surviving relatives.
Here to advise us on the matter is Stephanie Horne, the owner of Horne Title — a real estate law firm providing closing and escrow services to Louisville, KY buyers. Over the last 20+ years, she has managed hundreds of millions of dollars in client and bank funds. In this podcast, she discusses six reasons why you should think twice before adding your child or children to a real estate deed.
- Legal Trouble: If your child gets into legal trouble and ends up with a judgement placed against him or her, the court can place a lien on your property.
- Estate Planning Mix-ups: More often, homeowners place a child living locally on the deed, intending for that person to be the executor of the estate and split proceeds with the out-of-town or out-of-state children. However, if the child on the deed wants to claim the entire property and cut the others out, it is legally allowed.
- Gift Tax Hassle: When a name is added to a deed without asking anything in return, legally a “gift” has been given. Depending on the value of the property, this gift can easily exceed the annual limit for tax-free exemption (which in Kentucky is around $14,000 per year). The individual on the deed is often put on the hook to pay annual taxes on the $14,000 gift each year until the total value of the property has been reached.
- Gains Tax Hassle: The owner of a home can exclude up to $250,000 in capital gains tax on a primary residence (or $500,000 for married co-owners). However, when someone who doesn’t live there is added, they are unable to take that same deduction.
- Inheritance Tax Issue: When the homeowner dies, a $100,000 home gets stepped up in value. When heirs sell, they only pay tax on the $100,000 – not the $300,000 the home may be worth today. If someone else is on the deed, only part of the value gets stepped up, resulting in capital gains taxes that wouldn’t be owed if the person was just left off the deed.
- Medicaid Mess-up: If an older parent requires nursing home care, changes to a deed can affect Medicaid eligibility. In Kentucky, there is a look-back period where the government looks to see if there has been a sudden liquidation of assets, which is seen as a red flag.
Instead of placing children on the deed, Stephanie Horne recommends getting a simple will instead, which will tackle the probate issue without these additional tax and legal hassles.