Dear Jonathan: I am a widower and have five adult children. Rather than engage in any formal and costly estate planning, I plan to keep it simple by adding my daughter’s name to the title of my assets.

My assets include my home and bank and investment accounts. I also have two life insurance policies and an IRA, and I plan to name her as the beneficiary of those investments.

This way, after I die, all of my assets will end up in my daughter’s name without having to go through probate, and then she can divide everything with her brothers and sisters.

She is willing to do that, and I trust her completely. What do you think?

 

Jonathan says: This is part two of my column addressing this question. In Part 1, I listed several reasons why it would be a mistake to add your daughter’s name to the title of your assets.

In this column I will specifically address the reasons why it would be a mistake to add your daughter’s name to the title of your home. Those include:

 

1. As with your other assets, if you add your daughter to the title of your home, you will have made a gift to her of a 50% interest in your home, which will require the filing of a gift tax return with the IRS.

 

2. Once your daughter is added to the title of your home, she will be a co-owner, and she will now have a say in all decision-making regarding your home. For instance, you will no longer be able to sell the home or refinance the mortgage (if you have one) without her consent.

           

3. After you pass away and your daughter divides the ownership in the home among her siblings — either by adding them to the title of the home (which would be impractical) or by selling the home and dividing the proceeds with them — she will be deemed to have made a gift to each of them if the value of their respective shares exceeds $15,000.

 

4. When you add your daughter’s name to the title of your home, not only are you giving her a 50% interest in the home, but she is also receiving half of your cost basis, which is what you paid for the home.

This means that a capital gains tax will be incurred when the home is sold after you pass away. How much capital gains tax will have to be paid will be based on the difference between the home’s selling price and the amount of cost basis that is attributed to your daughter.

The greater the difference is in those amounts, the more significant the capital gains tax will be.

If, instead, you retain sole ownership of your home through the date of your death and have your children receive the home from you as an inheritance, they will receive what is known as a “stepped-up” basis in the property.

This means that your cost basis will be “stepped-up” to the home’s fair market value as of the date of your death. Consequently, if your children turn around and sell the home for its date-of-death value, they will not incur a capital gains tax.

 

5. When adding your daughter’s name to the title of your home, you have to make sure that the deed is prepared properly; otherwise, you could inadvertently create a tenancy in common ownership with your daughter.

This means each of you would become the owners of an undivided 50% interest in the home, and your interest would have to probated upon your death, which, of course, you are trying to avoid.

Instead of adding your daughter to the title of your home, the better plan is to set up a trust and retitle your home in the name of your trust. This will achieve what you are trying to accomplish without any of the potential problems I have discussed herein.

I recommend you meet with an estate-planning attorney, who can review all of this with you in more detail as well as explain how engaging in estate planning, including the preparation of a trust, would be beneficial to you, your daughter, and your other children. Good luck.

 

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, P.C., 1700 E. Beltline N.E., Grand Rapids, MI 49525.

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