How to Gift Real Estate to Family

Byline: Chad Nelson, Esq. & Brad Pelletier, Esq.

Estimated read time: 5 mins

Our clients frequently ask whether they can add their child’s name to their deed. The short answer is yes, they can, but whether they should is another matter. Adding a child’s name to your deed, which establishes co-ownership, can introduce risks and unforeseen consequences,  so we do not typically recommend it. The same benefits can usually be achieved by other means, such as creating a trust and transferring your property into it.

In this article, we explore the feasibility of gifting property to a family member using the most common type of deed in Rhode Island and Massachusetts (the quitclaim deed) followed by the alternative (commonly recommended) method of establishing a trust.

Common Misconceptions

One reason clients inquire about co-ownership with their children is for probate avoidance purposes. While it is true that adding a child’s name onto your property via a quitclaim deed allows the property to bypass probate (provided the deed is structured properly), doing so does not avoid other assets having to be administered in probate court.

Clients may well add their child onto the property via a quitclaim deed, assuming they have eliminated the eventual need for probate, only to find out down the road that probate was necessary to administer other assets.

Some clients assume that adding a child onto their home via a quitclaim deed is a foolproof way to protect it from the high costs of nursing home care, should such a need arise in the future. This is almost never the recommended way to protect a home or other property from long-term care costs. Adding your child(ren) to title via a quitclaim deed is considered a disqualifying transfer of assets for Medicaid purposes and may well trigger a Medicaid “lookback” unless a significant amount of time has passed. Also, we often see the child/co-owner in this scenario end up paying for the upkeep of the home when the parent-homeowner goes into the nursing home, since Medicaid recipients typically have no other available assets to use.

At this point, the house cannot be sold without undoing the quitclaim deed’s nursing home protection. Thus, the child-co-owner is stuck, unable to pay for the ongoing cost of the home, but unwilling to sell it for fear of losing half or more of its underlying value to the cost of long-term care.

Unforeseen Consequences

The best way to illustrate the tax pitfall inherent in this approach is to understand the tax benefit of inheriting a parent’s property through a will or a trust.

When a child inherits this way, they receive what is called (in tax parlance) a “stepped-up basis”. This means that if the child sells the property (post-inheritance), any gain in the property’s value that accrued during the parent’s ownership is eliminated, and thus, not subject to the capital gains tax. In other words, the child’s tax basis in the property is equal to the property’s value at the parent’s date of death. Only the gain in value over the course of his or her post-inheritance ownership tenure is subject to a capital gains tax.

If the child has been added to the deed during the parent’s lifetime, the child is unlikely to receive a step-up in basis for his or her portion of the property (the half that they ultimately inherit, does receive a step-up). To illustrate, the parent’s half of the property will likely be subject to capital gains tax based on the increase in value over the parent’s lifetime. In other words, by adding the child’s name to the parent’s deed, the family has unnecessarily exposed the child to a potentially significant tax burden.

Adding a child’s name to your deed as a co-owner via a quitclaim deed subjects your home to the child’s legal rights and liabilities━lawsuits, divorce, creditors, etc. If you wish to sell your property in the future, the child, as co-owner, must also agree to and participate in the transaction, and is entitled to his or her share of the sale proceeds.

Furthermore, the child may wish to sell the property, and if the parent does not agree, the child has the right to file a partition action in Superior Court. A partition action allows a co-owner of real property to force the sale of the entire property despite the unwillingness of any co-owner.  A judge would then determine if a sale and division of the proceeds would be the most equitable division of the property. Alternatively, a judge could allow one or more of the owners to purchase the interest of the other owner at a value determined by a court-ordered appraisal.

5 Reasons to Consider Transferring Real Estate to a Trust

There are different types of trusts that offer the same benefits as a quitclaim deed, but which do not come with the risks of co-ownership. By creating a revocable trust and transferring your home (and any other assets you wish) into it, your child can avoid the cost and hassle of a probate court administration upon your passing (benefit #1).

Your child(ren) will also receive a stepped-up basis in the property upon your passing, which in most cases will eliminate capital gains taxes (benefit #2). If you wish to sell your home in the future, you do not need the child’s permission or participation in the sale (benefit #3). While revocable trusts do not offer nursing home protection, irrevocable trusts do (again, without the pitfalls of co-ownership [benefit #4]).

Last, utilizing a trust to accomplish these objectives does not subject your home to the child’s legal rights and liabilities, even if they are the trustee of your trust and are responsible for administering the property (benefit #5).

Although trusts add an additional cost to your estate plan, it is insignificant compared to the cost avoided by not opting for the quitclaim or warranty deed shortcut.

To learn more about gifting or transferring real estate, or determine whether you might benefit from a trust, contact our office for a complimentary estate planning consultation.