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Don’t Put Children on Title to Your House

Roger McClure Nov. 6, 2009

Add Ellen to the Deed. When I did a weekly talk radio show for WRC in Washington in the 90s on real estate, every week a little old lady would call me about putting her daughter (Ellen) on the title to her home. The mother wanted to do this as a cheap and easy way to plan her estate. If she died with the house in the joint name of her and her daughter with right of survivorship, the house would automatically go to the daughter. No probate, no will and no need for a living trust or to talk to a lawyer. I always spoke against this idea.

Joint Liability. When the mother puts her daughter Ellen on title, the daughter becomes a joint owner. As a joint tenant, most states treat this as tenants in common for the purposes of liability. Ellen has a car accident and a judgment for $2,000,000 is entered against her. Ellen’s insurance limit is $500,000. The trial lawyer who got the judgment comes after all of Ellen’s property. Now that Ellen is a co owner of the home, the trial lawyer can get a court order requiring the sale of Ellen’s interest in mom’s home and mom gets evicted from her home, or has to buy off the trial lawyer. If Ellen gets divorced, a half of mom’s house may be part of the divorce property settlement with the ex son in law.

Medicaid Denial. Under current Medicaid rules, a transfer to a child would be a gift and would disqualify the mother from Medicaid for up to five years, depending upon the appraised value of the house at the time of the gift and other factors.

Can’t Sell. Mom can’t sell the property to a legitimate buyer without Ellen’s signature. When the house is sold, Ellen is under no legal obligation to give any of the house proceeds to mom. What happens if mom needs the money for a nursing home and Ellen needs the money for a life threatening illness of one of her children? If mom has Alzheimer’s, has a stroke or becomes incompetent, no one can sell the house until Ellen engages in an expensive and time consuming guardianship court procedure. When parents put children on title to their homes and later take them off to get a loan or sell the property, we have often found that there are title problems that prevent a later sale.

Vulture Takes Mom’s Home. A vulture investor may be willing to buy out Ellen at bargain prices for a payment of quick cash to Ellen. Mom can’t legally stop the vulture investor from then obtaining a court order for the sale of mom’s home.

Gift Tax. Mom has made a gift to Ellen which will probably be subject to a gift tax. If mom’s house is worth $500,000 and she owns it without debt, the gift to the daughter is $250,000, $237,000 more than the annual exemption of $13,000 from gift taxes in 2009. Should mom file a gift tax return? If mom intended a gift, then she is required by the tax law to file a gift tax return and use $237,000 of her $1,000,000 exemption from gift taxes. If mom sells the house and Ellen agrees that all of her share, worth $250,000, should go to mom, then Ellen has given $237,000 to mom and should file a gift tax return.

Pay Capital Gains Tax Unnecessarily. If mom filed a gift tax return or if Ellen can’t prove to the IRS that mom didn’t really give her anything in the house, then Ellen received one half of mom’s house based upon her mother’s basis in the property. Mom and dad (now dead) had paid $50,000 for the house and Ellen can’t find the receipts for improvements made during the lifetime of her parents. Therefore, mom’s basis in the property is $50,000. Ellen receives a basis of $25,000 in Ellen’s one half interest in mom’s house; one half of the mother’s basis of $50,000 is $25,000. When Ellen sells the house for a net of $600,000 after mom dies, Ellen unnecessarily pays a capital gain tax on one half of the house of about $55,000 at current rates and more with higher rates in the future.

Loans. How it happens, I don’t know. But, there are cases where a child goes out and gets a loan on the house without telling mom, the child pockets the money and later is unable to pay the loan. Mom loses her house in her old age to foreclosure. Or, mom wants to get a reverse mortgage and can not because the daughter is on title to the house.

Family Destruction. Mom had two daughters and son and mom’s will says everything goes in an equal split one third to each child. But, mom’s house passes outside mom’s will so her daughter Ellen receives not one third of the house, but 100% of the house. The will usually does not equal this out. Ellen must now decide whether to take money from Ellen’s family and give two thirds to her siblings and use up part of Ellen’s gift and estate tax exemptions for her gift to her siblings. If Ellen doesn’t do that, her sibling will believe that Ellen plotted this from the beginning so that Ellen could steal mom’s house from her brother and sister.

Living Trust. If mom had instead set up a living trust and named herself and Ellen as the trustees of the trust, she could have avoided all of these problems. We will cover the issues later that arise from putting a home in a living trust. After mom got off the radio talking to me, did she follow my advice? Probably not.