Idaho Law Blog
By Lane V. Erickson, Attorney
There many times as an estate planning attorney clients ask me whether it is a wise decision to name their children as co-owners on their house. Clients want to know how to do this because they believe it would be a good way for them to avoid probate when they die. Here are three reasons why you should not name your children as co-owners on your home.
1. Taxes
The first reason you should not simply add a child as a co-owner on your home is that you could be giving up a big tax benefit. When a home is transferred to children at your death, through a Last Will and Testament, the children won’t owe any tax on the gain in the house’s value during your lifetime. However, when you make a child a co-owner on your home, you just gifted up to half the value of the home away. By doing this your child could potentially owe tax on some of the gain in value of the home when you die. If the real goal is to preserve tax benefits and avoid probate there are other options available to you including the creation of a living trust.
2. Creditors & Bankruptcy
The second reason you should not add your child as a co-owner on your home is that you do not want your child’s creditors to take your home away. The average amount of debt carried by individuals in the United States is staggering. According to statistics provided by the Federal Reserve, in 2015 the average family had about $7,630 in revolving debt (credit cards), $11,244 in student loans, $8,163 in car loans, and $70,322 for home mortgages.
The good news is that bankruptcy filings are down. According to USCourts.gov, bankruptcy filings fell 6.9 percent for the 12-month period ending June 30, 2016. The bad news is that this still means that during this one year period annual bankruptcy filings in the United States reached the astonishing total of 819,159! This means that 1 out of every 150 households filed bankruptcy just between June 2015 and June 2016.
If you make a child a co-owner on your house then you are putting your house at risk from your child’s creditors. The same is true if your child files bankruptcy. Either your child’s creditor or the bankruptcy trustee would be entitled to collect up to half the value of your home unless your child is also living in the home with you.
The risks of your child’s debt causing problems with your home ownership are simply too great for us to recommend this as an estate planning strategy.
3. Divorce
Another reason we do not recommend that you add your children as a co-owner on the home is divorce. In the United States it’s often reported that the divorce rate is at or above 50%. It’s hard to get a concrete number but most experts agree that this is fairly accurate.
If you were to name your child as a co-owner on your home, and then that child were to get a divorce it is likely that their ownership in your home would have to be listed as part of the assets included in the divorce proceedings. What this means is that your soon-to-be ex son-in-law or daughter-in-law may have a right to make a claim of ownership in a portion of your home. When I explain this to my clients their eyes get wide and they assure me that they do not want their in-law to have any chance in getting any portion of the ownership of their home.
If you have a goal of passing the ownership of your home to your children or child there are many options that allow you to do this either before your or after your death. However, we strongly recommend that you do not simply make your child a co-owner on your home while you are alive. Doing so, without knowing the ramifications, could cause you severe financial problems.
Call us toll free at 877-232-6101 or 208-232-6101 for a consultation with Lane Erickson and the Racine Olson team of Estate Planning attorneys in Idaho. You can also email Lane Erickson directly at lve@racinelaw.net. We will answer your Idaho Estate Planning questions and will help you solve your personal estate planning needs.