Adding a deed of trust isn't always an effective way to make sure your child can inherit the property, and often has unintended consequences.
Putting a child's name on the deed to your property may seem like a harmless, easy way to ensure they can inherit your property. However, there are many potential complications when doing so.
In fact, there are many people who prefer to add their child's name to their deed instead of creating a will.
A will is a legal document that explains your final wishes and how you want to distribute your property. It often also includes information about your burial wishes, how to pay off your debts, and more.
It's important to have a will as part of your estate plan because it provides a clear plan for settling your affairs. Without a will, your estate might go to a probate court, where a judge will determine what happens to your estate.
Distributing property via your will is legally binding, and the inheritance may apply without as many complications. You can also place your real estate property into a trust. A trust relates to a will and can provide more specific instructions, as well as offer certain benefits, such as tax breaks.
There are many types of deeds, including a short-form deed, and a deed of trust in California; it is a type of deed that involves three parties. It transfers the legal title of real estate to a neutral trustee until the borrower pays back the money. At that point, the title company will return ownership of the property to the borrower.
Though putting your child's name on the deed of trust may seem like an effective way to pass on property, it often isn't so simple in practice.
The new owner may face a barrage of taxes, and it also may expose you to certain legal threats.
Joint ownership has many unexpected legal consequences. Here are just a few of the potential outcomes if you add a child's name to your deed of trust to show ownership.
Adding your child's name to your deed of trust in California makes that child the legal co-owner of your property, which means you don't have total control anymore.
When you own a home jointly, you don't have sole control over the property. Instead, your child's actions and finances can affect the status of your property. It also limits your ability to get a mortgage without getting your child's permission.
Additionally, there's the potential issue of a due-on-sale clause, which dictates that a home loan must be paid in full if the property transfers ownership. This can put the surviving joint tenant in a bind financially.
Making your child a co-owner can also count as a taxable gift, which can result in a hefty tax that your child may or may not be prepared to pay. As joint tenants, you each will have certain obligations.
Federal law states that recipients must pay taxes on gift property worth over a certain amount. With the right estate plan in place, an inherited property's deed transfers smoothly without the same tax issues.
To avoid this, consider adding them as a beneficiary of a trust instead. Your trustee can handle the property, and a lawyer can ensure that it is structured to minimize taxes.
Adding your child's name to your deed of trust can also result in additional legal problems. If your child happens to die before you, it's possible that their partial ownership of the house could pass on to his or her surviving spouse.
If your child dies, then that may result in their relatives inheriting their share of the property, whether that means a spouse, a child, or someone else.
The Garn St. Germain Act protects some property inheritors from secured loans due on sale clauses. It provides home exceptions for when a relative inherits property through a will, trust, or joint tenant laws.
Ownership of real property opens you up to claims from creditors. If you owe anyone a significant sum of money, they can come after your home to get their payments.
If your child is in debt, the creditors can attempt to get their money back from the home if it is held in both of your names. Creditors can go after vehicles, valuables, and even properties. They may try to force you to sell in order to get their payment.
Adding your child's name to deeds makes them an owner and counts as a taxable gift. In addition to affecting your child's finances, this can also affect your eligibility for Medicaid benefits, which becomes more important as you age.
The Medicaid application process involves checking to see if you have given large gifts with the intention of qualifying for Medicaid. Giving these large gifts can make you ineligible for Medicaid for a period of time.
That means if you add a beneficiary to your deed and then apply for Medicaid the same year, you may not qualify.
If your child ever runs into financial trouble, having their name on the deed to your home could affect your home ownership. If your child files for bankruptcy, for example, federal law states that the bankruptcy court could come after their partial ownership of your home.
In this situation, you could be forced to sell your real estate to pay off those debts. Whether it's your primary residence or another property, this can seriously affect your finances.
For most people, keeping full ownership of their property in life is the best move. Instead of using a California deed of trust to pass on property, consider creating a trust instead.
Parker Law Offices focuses on estate law, and we can help you find a satisfactory solution to your concerns about adding your child's name to your deed. We can help you create a comprehensive estate plan that allows for easy transfer of property to a beneficiary.
We pride ourselves on fostering a strong attorney-client relationship with everyone who seeks our services. For a free consultation, contact us at 949-867-4818 at Parker Law Offices today!