A Costly Estate Planning Mistake: Should You Add Your Children to Your Deed?

One of the most common estate planning myths I hear is this: “I’ll just add my kids to the title of my house by quitclaim deed so it won’t go through probate.”  Real estate quitclaim deeds in Colorado are legal documents that relinquish an owner’s interest, title, or claim in a property. As the name suggests, a quitclaim deed “quits” any claim or right that the grantor may have in the property. This sounds simple and inexpensive. In Colorado, however, this strategy often creates serious tax, legal, and family problems.

You may trigger gift tax and reporting issues.

Adding a child to your deed is a present day gift of real estate. Even if no tax is owed, the transfer may require filing a federal gift tax return. These unintended and unexpected compliance obligations catch many parents off guard.

You expose your home to your child’s creditors and divorce obligations.

Once your child is on title to your home, their interest is legally theirs. If they are sued, file bankruptcy, or go through a divorce, their share of your home can be claimed by creditors, a bankruptcy estate or become part of a marital dispute thereby putting your home at risk.

You lose control over your own property.

When you add your child to your title, you no longer own your home outright. Selling, refinancing, or even taking out a home equity line of credit now requires your child’s cooperation. If the relationship between you and your child deteriorates or a child becomes incapacitated, you may find yourself stuck and unable to take necessary steps to use your home’s equity for your financial needs.

Disputes between children can lead to forced sales.

Parents rarely consider the risk that when multiple people are co-owners of real estate, disagreements are common, especially after a parent’s death.  One child may want to keep the property, another may want to sell, and another may not want to contribute to expenses.  Under Colorado law, a co-owner can file a partition action, asking a court to force the sale of the property and divide the proceeds, but a partition action often results in expensive litigation, loss of family harmony, and the sale of the property that no one truly wanted.

You may create capital gains tax issues.

Property inherited at death generally receives a step-up in tax basis as of the date of the owner’s death, reducing capital gains taxes for heirs. Adding a child to title during life can eliminate this benefit and leave your child with a significant and avoidable tax bill.

A better approach

There are far safer ways to avoid probate—such as a revocable living trust or, in some cases, a properly drafted beneficiary deed—that preserve control, protect against disputes, and minimize taxes. Before using a quit claim deed as an estate planning tool, talk with an experienced estate planning attorney. What seems like a shortcut can become a costly mistake for your children later.