Relying on luck is no way to make a solid estate decision

Whether or not to add the kids to the title to the parents' home is a question that many families will deal with. It is widely thought of as a way to avoid probate. I've seen articles suggesting that parents add the children to the title and I'm sure many of you have, too. But is it really a good idea? A reader recently sent me a question about this very thing, so I thought I'd share it with you:

"My father passed away a year ago my mother now is the sole owner of the condo. She is 87 and wants to leave the condo to me and my brother 50/50 split. Should we be added to the condo's title? We both own homes will this create a tax issues for us both if we were to decided to sell the condo? Are there any tax or fees if she doesn't add us to the title? We are a bit confused to the best way to proceed." 

If your mother wants to leave the condo to you and your brother, she has two options (I am not including "do nothing and let the chips fall where they may" as an option).

Firstly, she could make a will, leaving the condo to the two of you in the will. Even better, she could make a will and leave her estate to the two of you, so that the condo itself need not pass through your hands if you aren't going to keep it. On her death, the condo is part of the estate.

Secondly, she could, as you mentioned, change the title while she is alive to add the two of you to it as joint owners. Then, on her death, the condo should still belong to the two of you as surviving joint owners. 

Many people are fooled into thinking that option number two is the better one simply because it is so easy and inexpensive to do. But since when were "easy" and "cheap" the hallmarks of a good idea? Let's compare the two options.

In option one, on your mother's death, there is no capital gains tax arising on the transfer of the condo to you two, or to the estate (assuming it is her principal residence).  Since you both own other homes, it does not appear that either of you will want to live there, so most likely the property will be sold. If it is sold from the estate to a buyer, there is no capital gains tax as I said, unless there is a delay in the sale during which the value of the property increases. 

The tax situation could be MUCH different if the property is transferred to the two of you during your mother's lifetime. On her death, her share of the property is not taxable, since that is her principal residence. But then you are going to sell the property, if my assumption is correct that neither of you is going to live there. This is where the potential tax comes in. If the condo increases in value during the time your names are on it, your shares of it are taxable when it is sold.

If your mother lives a long life, the taxes could add up.

There are other issues besides tax to consider as well. Let's assume that either you or your brother gets divorced before your mother passes away. If your names are on the condo, the soon-to-be-ex wife can claim half of her husband's share of it. The same could happen if instead of a divorce, you or your brother were being sued. If your name is on your mother's condo, it's not her condo anymore. It's yours as well and is up for grabs when there is a creditor. In other words, there is a risk that the condo will be lost before either of you gets to inherit it. It would be safer in your mother's name and distributed under her will.

Another issue that could crop up during the estate administration is that without the house in the estate, there isn't enough cash to pay for expenses and bills, so you two will have to come up with those amounts personally. On the other hand, the opposite could be true. Your mother could take steps she thinks will dispense with the need for probate only for you two to find that the will needs to be probated anyway because of other assets in the estate.

When I have this discussion with people, they often laugh and wave their hand dismissively at me and say none of this is going to happen. It must be nice to own a crystal ball that shows you that nothing bad is ever going to occur. I have been in this business long enough to know that the best way to proceed with planning is the safe and sensible way, with no crystal ball predictions that you're bulletproof.