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The primary goal of many people in the use of title to property, is to avoid having their estate assets probated and the associated costs and delays that go along with probate. In smaller estates (less than 5 Million Dollars in 2011), probate is relatively inexpensive because it can be done independent of court supervision.
However, a typical probate avoidance technique is to place the name of the intended beneficiaries on the title to real property. This is usually sons or daughters and the instrument commonly used to put the child's name on the property is a quit claim deed (QCD). This is done during the lifetime of the property owner and is commonly seen in the use of "joint tenancy" titles that give full rights of survivorship to the remaining children should one or more predecease the others.
With the aging of the American population, we are seeing more and more parents putting their children's names on titles as joint tenants as a method of avoiding probate, convenience and because the parents incorrectly perceive that putting adult children on the QCD protects the land from Medicaid recovery. While this line of thought is with good intentions, it can have unintended adverse consequences.
The execution of a QCD creates a completed gift in most states and in all states no later than at the time of recording the QCD. This completed gift can result in the imposition of federal gift tax to the extent the gift exceeds the annual gift tax exclusion amount, currently $13,000 per year (as of 2011) per grantee (26 USC 2503). In many cases no federal gift tax return is filed for such a transfer and this can result in the imposition of penalties and interest in addition to any tax due on the child whose name is added to the title of property.
Adding the name of another individual can have capital gains tax consequences to the person added by the QCD. When a grantor makes a gift to another person during the grantor's lifetime, the capital gains tax basis of that property in the hands of the new owner remains unchanged from the original owner. In other words, the cost basis remains what the original owner paid for the property however many years ago when first acquired.
If the added owner later decided to sell the property after the grantor died, that new owner pays capital gains on the profit made over the original purchase price. Contrast this with a situation where the beneficiary receives the property from a will or trust and he or she takes the property at the current market value called a "stepped up basis" and then only pays capital gains tax on the profit made beyond the stepped up basis value.
Another unintended consequence of adding the name of an adult child to the property can occur because the addition of the name constitutes a completed gift. The ownership interest vests in the adult child at the time of the conveyance. Should the adult child become involved in a lawsuit (ie: divorce, tort action or bankruptcy), the real property on which that child's name has been added is subject to those legal proceedings.
Remember that the only way a creditor or party that prevails in a lawsuit can not get at real property, is property titled as "tenants in the entireties." This is real property held only by a husband and wife. Creditors cannot force a sale on property held in the entireties by an innocent spouse.
In the case of a divorce of an adult child, the value of the child's interest in the property can be considered in the determination of the division of marital assets. In the case of a bankruptcy, the fact that the child holds an interest in the property makes it susceptible to satisfy the claims of the child's creditors.
The worst scenario and most sinister, is the situation where an adult child, whose name is placed on the home, takes out a loan and pledges the (parent's) home as collateral on the loan. Two problems arise in this situation.
First, if the child fails to honor the loan obligations he or she undertook, the creditor can attach the child's interest in the property.
Second, should the parents later decide to use the property as collateral for their own reasons, they may not be able to borrow against the property because it is already encumbered or if the child refuses to cooperate in the loan process.
In any event, the owner of property who adds a child's name by QCD to the land as a joint tenant may be deprived of access to the equity in what is probably the most valuable asset an elderly individual may own.
Another caveat is where the owner of property may wish to add to land ownership the name of their unmarried partner. In society today, it is not unusual to see persons living together in intimate relationships and remain unmarried. This type of relationship is not only reserved for young people.
Many older people, whose spouses have died, may wish to maintain their economic benefits (Social Security, pensions, medical, etc) at their current levels. Re-marrying may actually reduce the benefits a person currently enjoys. So, they choose to enter a committed relationship but choose not to marry. For this reason they still intermingle their assets including real property.
Placing the name of their significant other on the property can cause negative legal consequences in the event of a break up. The person added by QCD to the property may demand unreasonable compensation before signing off on a settlement.
Further, if governmental benefits are required in the form of a Medicaid nursing home, all available assets must be expended except for a nominal amount. If a couple is married and one spouse still lives in the marital home, the house is generally exempt from being considered in the assets of the institutionalized spouse.
There is no exception for unmarried couples. There have been significant changes to Medicaid rules and one is the extension of the so called "look back period" rule. In this rule, the government can look back five years from when the individual applied for Medicaid long term care benefits assistance (42 USC 1396 and 1396p).
The result is that anyone who adds the name of another individual by QCD to his or her home, other than a spouse, within five years of applying for Medicaid assistance, will be ineligible for a lengthy period of time beginning on the date the person would have otherwise been eligible for Medicaid assistance.
For these reasons, please consider very carefully before you irreversibly add another person's name to your real property. There are more effective ways to ensure your loved ones receive your property (ie: revocable trusts or Lady Bird Deed) upon your death yet allow you complete control over your land while you still live.
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