By: J. Scott Waters, IV, Attorney at Law
The question Southern Indiana will & trust attorneys hear from clients is, “Should I add my kids to the deed to my house?” People think this is an easy way to avoid probate when they die (we all will die) and it can be, but there are consequences. Recently I have drafted several Warranty Deeds where the parents/owners transferred fee simple title to the kids while retaining what is called, “a life estate.” In other words, my clients can possess and live in the property until death of the survivor of them, but the property is legally owned by the kids now. There are pros and cons of such a transaction in one’s estate planning, or as I like to describe it as, “transition planning.” People also think these techniques save costs in the long run relating to taxes, estate planning, and long-term care (Medicaid) planning. So, attorneys are constantly being asked to “just do a deed with my kids’ names on it.” Simply redoing a deed is easy, but unintended consequences can result that are often not easy to fix and can have significant practical (and tax) ramifications.
Putting the kids’ names on the deed is a tempting planning technique because it is simple and inexpensive. Sometimes it is inappropriately viewed as taking the place of a Last Will and Testament. As a result, it is very common for estate attorneys having to deal with issues when life’s situation changes. Parents believe they are giving up the headaches of ownership when adding the kids to their deed, but they are giving up much more; they are giving up control and limiting their future options. Another result of deeding to the kids and retaining a life estate is it gives the kids more involvement in the property. But these issues are just part of the problem. When a property is put in the names of several parties, the parent(s) and the kids, control and succession is created in the deed by listing the parties as “joint tenants,” “tenants in common” or “holders of a life estate” and “remaindermen” (those receiving the property after the life tenant dies). Most co-owners do not know the difference between “tenancy in common” and “joint tenancy,” and when done incorrectly heirs lose out on any sale proceeds because they were not “tenants in common” owners, rather they had a “right of survivorship” interest.
Furthermore, when that mistake comes to light, changing the form of ownership requires all parties must to sign a new transferring deed. This will be difficult since they may not all agree, one may be incapacitated, or one may have died. These circumstances can be overcome but at a large cost of money and time. The bottom line is that the method you use can have different consequences on the ultimate outcome.
Some people choose to add their kids’ names to their deeds to remove the property from their estate in anticipation they may need to go into a nursing home. Under Indiana Medicaid Law, property held as “life tenant” is not considered to be an “available” asset for calculation of Medicaid eligibility, and, therefore, the life tenant does not “own” the property and therefore cannot sell it to “spent down” prior to applying for Medicaid. Generally speaking, a person may make gifts more than sixty (60) months prior to applying for Medicaid, and these gifts will not affect his or her Medicaid eligibility under Indiana law. With fiscal problems at all levels of government, the chances of a retroactive extension of the 60-month rule is not only likely but probable.
Be careful not to execute documents too quickly without considering all the ramifications, most importantly the key one: income tax. By adding someone to the deed, you, the parent, are making a lifetime gift to that person, and the child (also known as the “donee”) then takes the tax basis (the price for which the property was purchased plus any capital improvements) of that property. Thus, when your child makes a sale of the property, they will have additional capital gains tax ramifications. Conversely, if the kids receive the interest after you pass away by Last Will, Living Trust, or a Transfer on Death Deed, they get a “stepped-up basis” for income tax purposes. The tax basis of the property is set to the fair market value at the time of death. If they sell it after your death for the date-of-death value, they will pay no capital gains tax. Of course, if they sell it later when the fair market value has gone up above the “date of death value,” they will only pay capital gains on that subsequent appreciation.
Thus, the questions “Should I put my kids on my deed?” and “What method do I use to put my kids name on the deed” are clearly not easy ones and should be carefully considered before taking any actions. It is important to ask, what am I trying to accomplish and does the means to that goal have any unintended consequences I want to avoid?
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Written by: J. Scott Waters, IV, © 2025