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Sunday, March 16, 2014

Six things to consider before adding your kids to your house title

One of the most common errors people make with their assets is to add someone - almost always one of their kids - to the title of their home or cabin. They have lots of reasons for taking the step, and it always seems like a good idea at the time. However, it rarely works out as well as people hope because the step is taken without considering the bigger picture.

A reader recently wrote to me to ask about adding someone to the title of her property as an estate planning move. Here are her question and my reply:

"Is it a good idea to add someone to the land title in addition to your will in order to ensure that your will cannot be contested?"

Everyone's situation is different, so there is no one right answer that fits everyone. Generally, I think adding someone to your property for reasons such as this can be dangerous, simply because the view is too narrow. There are so many other things that come into play besides whether changing the title will prevent the will from being contested.

Here are some of the things that should be considered before adding that new person to the title of the property, keeping in mind that it's a heck of a lot easier to add someone than it is to remove them later:

1.  Adding a person as a joint owner of  your property means that they own it as much as you do. Never mind who "really" owns it, who pays the property tax, or who lives there; by adding the name to the title you are conveying ownership. Now let's think about that. The person you have added can cause you to lose your property without ever meaning to. If they get divorced or go bankrupt or lose a lawsuit, their assets include your property. Are you prepared to take that risk? Does it seem like a more acceptable risk than someone perhaps contesting your will?

2.  Adding a new person to the title may cause that person a tax problem when you pass away. If the house is not that person's principal residence, sale of the property is subject to capital gains tax.

3.  If the person you are adding is one of your children, your plan may backfire if it is not properly documented. The law says that when the property originally belonged to the parent and a child is added, the property has to be held in trust until it can be determined whether it is a "true" joint ownership. In your case, proper documentation of your intentions could well result in the joint ownership being upheld, but without that documentation, the house could end up in the estate anyway.

4.  On a similar note, adding someone as a joint owner is almost always the kind of home-made estate planning that people do without consulting a lawyer. Since the same people also tend to make their own wills without a lawyer, there is frequently a real disconnect between the will and the actual legal situation. For example, people tend to make wills leaving their estates equally among their children, without explaining how the house in joint names is supposed to be dealt with. Is it supposed to be in addition to the equal shares? Or is it part of someone's equal share? Plus, they rarely think to deal with the contents of the house separately, leading to disputes about memorabilia and personal items. These questions lead to lawsuits.

5.  Your will could possibly be contested on other grounds that have nothing to do with the house. You might be better off finding ways to make the will stronger, rather than changing the title. There are clauses you can have added to your will to clarify your intentions, and even explain them if that is what you want.

6.  People can't just contest every will out there because they don't like what is in it. There would have to be a legal reason. If you have a will that leaves your estate equally to your children, with one child taking the house as part of their equal share, what legal ground is there for someone to contest? Even if you are not treating your children equally, you are entitled to do this (except in BC where a person can contest a will that they don't think is fair).

My best advice to anyone who thinks there is a good chance their estate is going to be contested is to take the time to talk through your whole estate plan - that means not just the house - with an experienced estate lawyer. You need to look at the big picture and how the house fits into it.

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