Some of my older clients have joint bank accounts with their adult children. Their objective is one of "convenience" by allowing their children access to their checking or savings accounts to help pay their bills and manage their financial affairs. They also think that it's an "easier" and "safer" method of avoiding probate because their children are already on the account. For the same reasons mentioned, these same clients often want to add their adult children to the deed of their house. Inevitably, they often ask me whether they should add their children to the deed instead of bequeathing the house through a Will.
The brief answer is no. The only reason why you should add an adult child to a real estate deed is if both of you are, in fact, purchasing real property together by contributing equally to the down payment, being jointly liable as the mortgagees, making mortgage payments together, and living in the house together as both of your homestead property. Falling short of this reason, it's a terrible idea.
First, adding your adult child to the deed does not necessarily avoid probate. Most warranty deeds do not include the requisite language to automatically transfer property to the surviving owner. Often, the death of the elder parent still requires some legal action to transfer property to the heirs of the estate. It's possible that the heirs of the estate are the same as the adult children listed on the deed.
Second, adding your adult child to the deed immediately raises property taxes on the house unless all owners reside at the property. County tax appraisal districts often reduce property taxes when the owners qualify for homestead exemptions. Property taxes are further reduced when all of the owners are over 65 and you get a break from paying taxes to the local school district. You often see a partial tax break when one spouse is over 65 but the other is not. Having joint owners often mean the loss of these tax deductions because one of the owners no longer qualifies for an exemption.
Third, adding your adult child to the deed will mean the loss of several tax benefits. If the elder parent decides to sell the house, then they will lose the home sale exclusion on capital gains. At the time of this writing, individuals may exclude $250,000 and couples may exclude $500,000 from the sale of their primary residence. Having joint owners mean that capital gains will be divided equally among all of the owners and the owners not residing in the property (i.e. the children) cannot take advantage of this deduction. Similarly, the house no longer qualifies for the full step-up basis upon the death of the elder parent. Normally, the cost basis of the house would be adjusted to match its fair market value as of the date of the elder parent's death. Having joint owners mean that only a portion of the real estate qualifies for an adjustment in valuation.
Fourth, adding your adult child to the deed will mean the house may lose its homestead protection as an exempt asset. The real property is now subject to additional creditors if your adult child owes money, files for bankruptcy, or gets divorced because the house is now a non-exempt asset of the adult child. Creditors could put a lien against the house or request that a judge order an involuntary sale of the property. In cases of divorce, the now-acquired house is also presumed to be community property in Texas and subject to marital division.
Fifth, adding your adult child to the deed is treated as a gift and potentially subject to 40% gift tax. While gift taxes are easily avoided by filing a Form 709 and claiming a deduction against the lifetime tax exemption (currently $11.7 million at the time of this writing), this gift may inadvertently disqualify the elder parent from government assistance like Medicaid. Normally, the residential property is a noncountable asset for the purposes of applying for Medicaid and most government benefits; however, the gift transaction is viewed as a transfer of assets and presumed for the purposes of preventing the government from recovering assets upon death.
What most clients mistake as "convenient," "easy," or "safe" is anything but. The unintended consequence of becoming a joint owner often leads to undesirable results for all parties involved. Estate Planning attorneys can advise on better methods of transferring wealth that accomplish their clients' objectives.