Should I add my child's name to the title of my house to avoid tax in the future?

An awful lot of parents have added their children to the title of their homes without getting legal or accounting advice first. In fact, I'm amazed at how many people have done this, given the risks and complications. A reader wrote to me to ask about whether he should add his oldest daughter to his house title. I suggest that anyone who is considering making this move, or has already done so, should read this post for some food for thought. His question and my reply are below:

"I am in the middle of purchasing a residential property. Is there any advantage if I purchase in my name + wife's name and eldest daughter's name. My thinking is for future when we both are not here, then our daughter retains this property without any tax implications."

When considering putting extra names on a title, it's a mistake to focus on just one aspect of the transaction, whether that aspect is tax, probate avoidance or any other concern. You have to look at the bigger picture.

You have to realize that in adding your daughter's name to your home, you are creating a huge risk to yourself. There are a dozen ways in which this could cause you to lose your home, or to lose a substantial sum of money to hold onto your home. If your daughter were to get divorced, her spouse could claim half the value of the house and if she doesn't have the funds to pay this out, you could end up paying it yourself just to stay in your own home.

If you are like most parents, you will stubbornly believe that your daughter will never do anything that would negatively impact you. As a parent, I understand that faith, but as an estate lawyer I know how misplaced it is. There are things that could happen to your daughter accidentally that could cause you to lose your home. For example, if she is sued because of a car accident or if she declares bankruptcy or if she has a business failure for which she has provided a personal guarantee, you could lose your home. It's impossible to say at this moment that none of these things will happen during your lifetime.

You also need to look more closely at your presumption that your daughter will "retain this property". It sounds as if you have more than one child. If you have a will that leaves your estate equally among  your children, you have to ensure that you are clear about whether this house is part of her share. Otherwise it could lead to a dispute among the children.

You may run into the issue of inter-generational joint property. From what you've said, your intention is not for her to own the property but simply to avoid tax issues. Therefore it isn't a "true" joint ownership in the sense that you don't intend for her to own and retain this property for her own use after your death. Your property may be held in trust for the estate until a judge decides on the available evidence whether or not this is a true joint ownership.

Now, to your question about tax implications. If the residential property was owned just by you and your wife, and it was your principal residence, there would be no tax anyway when the property was sold or transferred on your death. So you aren't avoiding any tax by adding your daughter's name.

If it's not your principal residence but is a second property such as a cabin, revenue property or simply a second family  home, then there is going to be capital gains tax on its sale or transfer (assuming that it increases in value) even if your daughter's name is on it.

Let's say that your daughter is single now but gets married, and she and her husband buy a home. You may one day decide to sell your house either because you want to move somewhere else or because you are going to live in a care facility. As your house won't be her principal residence, her share of the transaction will be taxable.

The best people to talk to about taxes are accountants. If you have a chance to discuss this transaction with an accountant, I think that would be a good idea.