Myth 1: If both spouses’ names are on the deed to their home, the house will automatically avoid probate when the first spouse passes away.
Many people may assume that if both spouses are listed on the deed, their home will automatically pass to the surviving spouse without involving the court-supervised process known as probate. However, that is not always the case.
The key is how the property is owned (titled), not simply whose names appear on the deed. Different forms of property ownership come with different legal consequences:
- Joint tenancy with right of survivorship: The surviving spouse automatically becomes the owner of the property.
- Tenancy by the entirety: Available only for married couples, the surviving spouse automatically becomes the sole owner; however, this form of ownership is not available in every state.
- Tenancy in common: This form of ownership does not include an automatic right of survivorship; instead, each spouse owns a separate share in the home, which may still need to go through probate.
Probate determines who gets your property after you pass away. It may add time, costs, and administrative complexity to the process of settling your estate and distributing your assets. If you and your spouse have a blended family, probate may come with additional complications if different family members have competing expectations about what should happen to your real property.
Even when spousal ownership avoids probate, it may raise other questions, such as how the property will be treated in the event of divorce, creditor claims, or remarriage.
Myth 2: Adding a child to a deed is a simple way to avoid probate.
Parents may add their child(ren) to the deed to their home because they believe doing so will avoid probate or make life easier for their loved ones if they need to step in to manage the property during periods of illness or incapacity. However, adding your child to the deed is not simply putting a plan for the future in motion; it is a present transfer of ownership, through which your child immediately becomes a legal co-owner of the property.
This approach can create unanticipated and undesirable consequences. One consequence is gift tax issues. Since you will be making a gift of valuable property, it is highly likely that it will at least carry reporting obligations even if it does not result in a tax payment liability. Another consequence is losing a full step-up in tax basis; if you own the property, it is likely eligible for a full basis adjustment on your death, but transferring a portion to your child now impairs that adjustment and can increase capital gains tax liability if your child later sells the property. This choice also exposes your home to your child’s creditors, lawsuits, or divorce. In addition, you may now require your child’s consent to sell, refinance, or mortgage the property. If you have more than one child, adding only one of them to the deed to your home could also backfire by creating unwanted family tension or confusion around what should happen to your property at your death.
We invite you to call us for guidance at 708.448.5169.
