Before You Add Your Kid to the Deed…
Many parents believe that adding a child to a bank account or placing a child’s name on a home is a simple way to “avoid probate” or make things easier for the family. In some situations, these strategies may help accomplish certain goals. However, they can also create unintended legal, tax, and family complications.
Adding a Child to a Home
Parents sometimes add a child to the deed of their home in an effort to avoid probate or simplify inheritance. While this may work in some situations, it can also create potential tax and ownership issues.
Under current tax law, property inherited at death generally receives a “stepped-up” tax basis to the property’s fair market value at the time of death. However, when a parent adds a child to the deed during the parent’s lifetime, the child may instead receive part of the parent’s existing tax basis.
As a result, if the property is later sold, the child could potentially owe significantly more capital gains tax than if the property had been inherited at death instead.
🎥 Quick video explanation
Many families believe adding a child to the deed is a simple way to avoid probate. In this short video, Greg explains how doing so can sometimes create unintended tax and ownership consequences, including potential capital gains issues and loss of control concerns. (Video autoplays muted.)
For example, if a parent purchased a home decades ago for $100,000 and the property is worth $500,000 at death, a child who inherits the property may generally receive a stepped-up basis near the $500,000 value under current law. By contrast, adding the child to the deed during life may cause part of the original $100,000 basis to carry over instead.
Adding a child to a deed may also create potential complications if the child later faces creditor claims, lawsuits, or marital issues. In addition, once ownership is transferred, the parent may no longer have complete control over the property.
Depending on the situation, alternatives such as beneficiary deeds or trust-based planning may allow property to transfer outside of probate while allowing the owner to retain control during life.
Adding a Child to a Bank Account
Parents also sometimes add a child as a joint owner to help pay bills or assist with finances as they get older. However, adding someone as a joint owner may also give that person immediate legal access to the funds in the account.
Depending on the account structure and applicable law, the surviving joint owner may also receive the remaining balance at death regardless of what a will says. This can sometimes create disputes among family members if other beneficiaries expected the funds to be divided differently.
Joint ownership may also create potential complications involving the child’s creditors, legal disputes, or marital issues.
In many situations, a properly drafted financial power of attorney may allow a trusted person to assist with finances without changing ownership of the account.
There May Be Better Options
Estate planning is not one-size-fits-all. A strategy that works well for one family may create unnecessary complications for another.
If you have questions about how your home, bank accounts, or other assets may pass at death, speaking with an estate planning attorney and tax professional can help you better understand your options and any potential tax consequences.
Disclaimer: This article is provided for informational and educational purposes only and is not intended as legal advice. Reading this article does not create an attorney-client relationship with Ozark Trust and Estate PLLC. Estate planning and tax issues can vary significantly based on individual circumstances, and laws may change over time. You should consult with an attorney regarding your specific situation.
