By: Andrea Blum Team
Do not add your children on your title. US EDITION
Tags: buyers, home, seller, real estare, toronto, Refinancing, Mortgage , Rent, Financials, Blog. prices, CMHC, US, home title
It is very common for parents to put their children’s names on their bank accounts, deeds, and other property so that the children can assist their parents with paying bills or managing their finances. But is that a good idea? The short answer is simple –No.
Here is why—when you place your child on your deed or account you are legally giving them partial ownership of your property. Thus, if your son or daughter get divorced, file bankruptcy, or have other financial trouble, their creditors can take your property. Unfortunately, this happens quite often. It is tragic to see a child’s ex-spouse or creditor take their parents’ property, particular since it is easily avoided.
There is also another reason which has to do with taxes. If you add your child’s name to your property as an estate planning techniques he or she may be missing out on a huge tax break called “step-up basis at death.” To better understand the significance, you must first understand your capital gain tax. The government defines a capital gain or loss as the difference between your basis (purchase price) and the amount you get when you sell an asset (sale price).
For example, if you purchased $1,000 in stock and sold that same stock today for $100,000 you would have to pay tax on your gain of $99,000.
Tax Benefits of an Estate Plan
Using that same example, say instead you bought the stock for $1,000 but passed away before it was sold. Currently, your heirs would receive a step-up in cost basis.
Meaning, they are given a new cost basis for the assets valued at the date of your death. If the stock was worth $100,000 at the date of your death and your heirs sell the stock a few years after your death for $110,000, then their taxable gain would only be $10,000 (not $109,000). This is because your heirs’ tax basis is stepped-up to the value of the stock at the time of your death. In this scenario, there new stepped-up basis would be $100,000. As such, your heirs are only taxed on gains realized from the time of your death to the date the stock is sold.
The step-up in basis applies to inheritances received from a probate estate, trust, and other estate planning techniques.
Adding a child’s name to property usually deprives them of the ability to qualify for a stepped-up tax basis. Therefore, in our example, if your heirs sold the stock for $110,000 after your death they would pay capital gains tax on $109,000 rather than $10,000. As such, they could have to pay ten-times more taxes to inherit the same property. This is a very good reason not to add your son or daughter’ name to your property.