Why Adding Your Child to Your Deed Can Be a Costly Mistake
- Ashley Sharek
- 6 hours ago
- 5 min read
Many Pennsylvania families have been told that adding a child to their house deed is a simple way to avoid probate. On the surface, it seems like a quick fix. Instead of dealing with the probate court after death, the house automatically belongs to the child. No court, no legal process, no delays.
Unfortunately, what seems like a smart strategy can often cause far greater financial harm to the very people you were trying to protect.
In this article, we will explain the hidden consequences of deed transfers, the tax impact of capital gains, and what a better estate plan could look like. If your goal is to avoid probate without creating surprise tax bills for your loved ones, this guide is for you.
A Real Example from a Pennsylvania Family
One of our clients came to us with a story we hear all too often. Years ago, they added their son to the deed of their family home. The home had been purchased for $40,000 about four decades ago. Today, that same home is worth approximately $450,000. They believed that by adding their son to the deed, they would avoid probate court entirely. What they did not know was that this decision carried major tax consequences but because the son was added as a co-owner during their lifetime, he inherited their original cost basis of $40,000.
When the home was later sold, he owed capital gains taxes on the entire appreciation of $410,000. Had he inherited the home through an estate plan or trust, that tax bill could have been avoided entirely.
This is a costly mistake that could have been prevented with proper guidance.
What Is a Step-Up in Basis and Why Does It Matter?
The step-up in basis is a provision in the tax code that allows inherited property to be valued at its fair market value on the date of the original owner's death. In plain terms, this means that if your loved one inherits your home through an estate or trust, the value of that home is calculated at the time of death, not the time of purchase. This step-up helps avoid massive capital gains tax bills when the property is eventually sold.
Here is a simplified example:
You purchase a home in 1980 for $40,000
At the time of your passing, the home is worth $450,000
Your child inherits the property through your estate or trust
If your child sells the home for $455,000 soon after, they only owe tax on the $5,000 increase
Now compare that to gifting the house during your lifetime:
You add your child to the deed today
They inherit your original cost basis of $40,000
When they sell the home for $455,000, they owe capital gains tax on the $415,000 gain
This is why the step-up in basis is so important for families. It protects your children from a significant financial burden.
Why Families Try to Avoid Probate
Probate is the legal process of settling a person’s estate after death. In Pennsylvania, probate is public, often slow, and can be costly if not planned properly.
Families may experience:
Delays in accessing assets
Legal fees and court costs
Disputes between family members
Loss of privacy
Many people want to avoid probate altogether. While that goal makes sense, the method of achieving it is just as important as the goal itself. Avoiding probate by gifting assets during life often creates more problems than it solves.
The Hidden Risks of Adding a Child to Your Deed
Aside from capital gains tax, there are several additional risks that come with transferring ownership of your home while you are alive.
Loss of Control
When you add a child to your deed, they become a legal co-owner. That means if you want to sell or refinance the property, you will need their permission. If there is ever a disagreement or family conflict, you may be legally stuck.
Exposure to Your Child’s Legal or Financial Issues
If your child experiences a divorce, lawsuit, bankruptcy, or other legal issue, your home could become part of those proceedings. Their creditors may have the right to place a lien on the property, even if you still live there.
Medicaid Ineligibility
In Pennsylvania, gifting your home to a child may make you ineligible for Medicaid benefits if you need long-term care within five years of the gift. This could result in a denial of coverage or a significant penalty period, putting both your care and your home at risk.
The Importance of a Comprehensive Plan
Estate planning is not just about avoiding probate. It is about protecting your family from unintended consequences. It is about making sure your values and assets are preserved in a way that aligns with your goals.
At Entrusted Legacy Law, we take a comprehensive approach to planning. We look at:
Your family dynamics
Your financial situation
Your long-term health care needs
Your estate tax exposure
Your goals for passing wealth and values to the next generation
From there, we create a plan that solves all of these challenges in a thoughtful, integrated way.
Better Alternatives to Adding Your Child to Your Deed
There are several strategies that allow families to avoid probate without incurring unnecessary taxes or legal risks.
Revocable Living Trust
A revocable living trust allows you to transfer ownership of your home and other assets into a trust during your lifetime. You still control the trust and can change it at any time. When you pass away, the trust avoids probate and your beneficiaries receive the property without the capital gains tax burden.
Medicaid Asset Protection Trust
This type of trust is specifically designed to help protect your home and other assets while still qualifying for Medicaid benefits if long-term care is ever needed. It does require planning in advance, typically at least five years ahead of time, but it is a powerful tool for families concerned about nursing home costs.
Beneficiary Designations and Transfer on Death Options
While not available for real estate in Pennsylvania, other assets like bank accounts or investment accounts can often pass outside of probate by using proper beneficiary designations. This strategy should be part of a larger coordinated plan.
The Real Cost of a Quick Fix
Adding your child to your deed might seem like a quick fix to avoid probate. It may even be advice you received from a well-meaning friend or online article.
However, what you save in probate fees could be lost many times over in capital gains tax, family conflict, or government benefit ineligibility.
The cost of doing it wrong is far higher than the cost of doing it right.
How Entrusted Legacy Law Can Help
At Entrusted Legacy Law, we serve families throughout Pennsylvania who want to protect their assets, preserve their legacy, and plan with intention. We do not believe in one-size-fits-all advice. Our team of attorneys and professionals takes time to understand your specific goals and family dynamics. We walk you through the best options for your unique situation and help you create a plan that gives peace of mind for generations to come.
If you are thinking about gifting your home, transferring ownership, or want to make sure your existing plan will actually work when your family needs it most, we are here to help.
Schedule Your Free Strategy Session
Do not let a well-intentioned shortcut turn into an expensive mistake for your family. Get the clarity and confidence you deserve.
Schedule your free estate planning strategy session with our team today.