Adding Your Kids To Your Deed Is Rarely A Good Idea

Please stop adding your kids to your deed to avoid probate.

We understand the impulse. It sounds simple, it sounds free, and someone probably told you it works. But this strategy creates real problems that most people do not find out about until it is too late to fix them.

Here is what actually happens.

You may trigger a gift tax issue. Adding a child to your deed is a taxable gift of a partial interest in the property. Depending on the value, it may need to be reported to the IRS. Most people have no idea they just made a taxable gift.

You may cause a property tax reassessment. In California, transferring a partial interest in real property to someone other than a spouse can trigger a reassessment of that share at current market value. For a property with a low tax base, that can mean an immediate and permanent increase in property taxes.

You cost your child a significant tax benefit at your death. When someone inherits property through a trust or estate, they typically receive a stepped-up basis, meaning the property's cost basis resets to its fair market value at the date of death. This can eliminate or dramatically reduce capital gains taxes if they sell. When you add a child to the deed during your lifetime, they do not get a stepped-up basis on the share you gifted them. That gift could end up costing them far more in taxes than probate ever would have.

You are assuming your child will do the right thing. If you add one child to the deed thinking they will split the proceeds with their siblings when you die, you should know there is no legal requirement that they do so. That property belongs to them. And even if they do intend to share it, transferring a portion of the property to their siblings at that point could create gift tax issues for them in turn. It can also become subject to your child’s creditors or judgments, if any.

A revocable living trust accomplishes everything you were trying to do with none of these consequences. If you or someone you know has already added a child to a deed, it is worth talking to an estate planning attorney about whether and how it can be unwound.