Adding a Child on Title
I hear from many retirees who want to add their children onto the title of their home so that it bypasses their estate and probate. In their minds, it is as simple and easy as signing a few forms and with all the potential benefits, is considered a “no brainer”.
Joint ownership of property is a popular estate planning tool, but many don’t understand how much potential risk it involves. Unfortunately, like many aspects of financial planning, it is just not that simple. Anyone considering transferring a house or any other asset such as an investment or bank account should first consider all the legal and tax implications of such a move.
Matrimonial Claims: If an asset is transferred to joint ownership with your child, their spouse or common law partner now has a potential claim against that asset since their partner (your child) is now an owner of said asset. No matter how strong you feel their marriage might be, people split up for various reasons and your house could now be part of the assets that are divided up in that divorce.
Exposure to Creditors: Much like matrimonial claims, your child could end up facing a personal or business debt or liability from any number of things, even something like a car accident. Your home or investment account is now considered one of their assets and creditors would have the ability to come after it.
Immediate Tax Consequences: A transfer to joint ownership with another person can result in an immediate disposition of property for income tax purposes. This triggers any unrealized capital gains which will result in immediate tax. If a house is a primary residence, it likely won’t trigger any taxation but a family cottage or an investment account being rolled into a joint ownership position could result in a big tax bill.
Loss of Control: One of the biggest risks of transferring to joint ownership is the loss of control of the asset by the original owner. In the case of an investment or bank account, the new joint owner can drain funds or otherwise misuse them. Many people considering such a move will wave it away since they trust their child so much, but the risk cannot be ignored. Unfortunately, people do change and a mental breakdown or substance abuse problem in the future could cause them to act quite differently from the way they do now. As a parent ages, a child may think that they know what is best and a difference in opinions can lead to disputes on when the timing is right to sell the home and move into assisted living facilities.
Incapacity Complications: A joint owner of a property does not automatically have the right to make decisions regarding the asset on behalf of another joint owner who becomes incapable due to dementia or other reasons. If a proper legal framework is not in place, the joint owner (child) may end up having to make decisions regarding the property with some appointed as the incapable owner’s attorney or legal guardian. This appointee may have a legal obligation to liquidate the property which might not be in everyone’s best interest.
The above is just a sample of the many legal and financial complications with transferring your home or other assets into a joint ownership structure. A decision to transfer property into joint ownership is far more complex than many realize and should not be done is haste to simply save on some probate fees. Be sure to seek out professional advice if you are contemplating such a move so that your unique circumstances can be considered.