Whether you are giving your house to your child or adding your spouse to the deed of your real estate, there are a few things to consider before signing on the dotted line and going to the local courthouse to file your deed. While doing a new deed may not seem like an arduous task, it is prudent to discuss the process with an attorney because of the ramifications that may result. The following are a few areas to examine prior to making your decision.
First, joint ownership may mean joint debts. Once you add someone to your deed, the property may become subject to any existing and future liens or encumbrances of the joint owner, depending on the debts and how the property is held. If the property is held as tenants by the entirety, a special designation under Maryland law for married couples, then a creditor will not be able to attach to the property. However, if it is held as joints tenants with the right of survivorship or tenants in common, then adding a name to the deed could expose your property to liability and creditors, and subsequently, affect the sale process.
Second, due on sale clauses should be reviewed. Under the standard terms and conditions of a conventional mortgage contract, when taking out a mortgage, you are required to hold title to the property until you pay off the loan. Also, most contracts contain a due on sale clause that typically will accelerate the balance of the loan if you sell, convey or transfer title to the property before it is paid off. It is important to review your document and contact your mortgage company to verify whether it will cause a default acceleration of the loan when changing the title.
Third, capital gains and gift taxes are areas that may take you by surprise. If your house is gifted to your child during your lifetime, he or she will take the same cost basis for what you paid for the house. In so doing, when your child goes to sell the property, he or she may incur unnecessary capital gains taxes to pay on the sale of the residence. There are various exemptions and exceptions that may apply in order to avoid these taxes, but it depends on the law at the time of sale. On the other hand, if your property passes through estate or trust administration after your death, your loved one will typically receive a stepped-up basis, which is the current market value at the date of your death. Moreover, when giving your property to an individual other than your spouse, it should be considered whether you will be incurring a gift tax, or alternatively, using a portion of your estate tax exemption, which may be needed at your death. The tax rules and limits constantly evolve, so it is necessary to stay knowledgeable of changes in the law.
It is important to remember that your reasons for deeding real property are probably different than that of your neighbor. Also, how it affects your personal and financial situation is undoubtedly unique. Objectives such as avoiding probate, trust flexibility and spending down for medical assistance may determine what is best to meet your needs. And if your decision is to deed one of your most valuable assets, please consult your estate planning attorney to assist in the drafting and recording of the document.
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