How to Add Someone to a Deed*
One of the most frequent calls we get is, "How do I add someone to my deed?" In most cases the literal answer is quite simple: execute and record a deed granting an undivided ownership interest in the property to the person in question. In real life, though, things are rarely so simple. By way of example, assume that Jane owns some land and wants to add Bill as a co-owner.
If the property is encumbered by a mortgage, the first issue to consider is whether adding Bill to the deed will violate the terms of Jane's loan documents. The vast majority of Texas mortgages contain a "due on sale clause." Essentially, a due on sale clause states that if the debtor attempts to convey any interest in the property before the loan is paid in full, the lender may declare the loan in default. If the loan documents contain a due on sale clause, the best approach is usually to ask the lender to consent to adding someone else to the deed. For everyone's protection, the consent should be in writing.
Our experience has been that the smaller "home town" lenders are usually more willing to consent to transfers than the larger companies. If the lender will not consent, the options are limited.
One possibility is for Jane to look for another lender to take over the loan. Of course, she will have to invest some time locating a willing lender and going through the loan application process, and there will be closing costs associated with the new loan.
The other obvious alternative is to make the transfer without the lender's consent, but doing so can be dangerous. It is very likely that the lender will eventually discover the transfer even if Jane does not disclose it. (For example, the lender may receive an updated assessment notice from the tax appraisal district, or an updated binder from the insurance company, or Bill may contact the lender to inquire about the status of the loan.) If the lender discovers Jane has made an unauthorized transfer and declares her in default, the property may be foreclosed in a matter of weeks unless she either pays off the loan in full or agrees to refinance at rates that may be significantly higher than the original loan.
Liability and Asset Protection
Joining someone else as a co-owner of your property may expose that property to the claims of your co-owner's creditors. For example, if Jane adds Bill to her deed and Bill later causes an automobile accident for which he is sued, the plaintiff may be able force the sale of Jane's land to pay for the injuries. Similar problems may arise if Bill dies and an uncooperative heir inherits his interest, if Bill files bankruptcy or gets divorced, or if liens are filed against Bill for unpaid income taxes or child support.
Loss of Control
As the sole owner, Jane has absolute control over her property. For example, she alone has the right to decide whether to sell it, and at what price. She may choose whether to refinance, whether to take out a home equity loan, and what improvements should be made. However, once Bill acquires an ownership interest his consent will be required in all these matters. If Jane and Bill cannot agree, they may end up in court to resolve the dispute.
Giving Away the Farm
If the property is subject to a mortgage and Jane's lender consents to the transfer, Jane needs to consider that making Bill a co-owner does not make him liable for payment of the loan. The net effect will be that if they later end up on unfriendly terms Jane must continue to make payments on the mortgage from her funds, but Bill will remain an owner without any financial liability.
Loss of Exemptions
Assume that Jane has property tax exemptions for being over 65, and for homestead. Depending on the wording of her deed, Jane may lose the right to claim these exemptions when she makes the transfer to Bill. The net result is that Jane has not gotten any younger and is still living on the property, but the property taxes will be much higher.
Gift Tax Consequences
Under the current IRS rules, a person can give away a fixed amount of money or property per person per year. Any gift exceeding this limit may require the donor to pay gift taxes. If Jane proposes to give an interest to Bill rather than selling him a share at fair market value, she should consult with her tax professional to ensure there are no unpleasant surprises next April when her federal income tax return is due.
A transfer by deed during the donor's lifetime (instead of by a Will upon death) can have other adverse tax consequences. If Jane leaves her land to Bill in her Will, Bill receives a "step up" basis. This means that when Bill eventually sells the property, capital gains taxes are computed based on the value of the property at the date of Jane's death--not when she originally purchased the property. Since land usually increases in value over time, the "step up" basis reduces capital gains taxes. However, if Jane makes a gift of that same property during her lifetime, Bill does not get a "step up" basis; rather his basis will be the same as Jane's.
Transfers of property may also affect Medicaid eligibility. This topic is much too complex to cover here, but suffice it to say that unless Jane makes the transfer more than five years before filing her Medicaid application, she may be disqualified for Medicaid assistance.
There is a common misconception that adding a co-owner to your deed will help avoid probate because the property will automatically pass to the co-owner on your death. This is not true! There are a number of strategies for estate planning, but merely adding someone to your deed is not one of them.
The client who asks "How do I add someone to my deed?" is usually getting the proverbial cart before the horse. In most cases, the better question is, "What issues do I need to address before deciding whether to add someone to my deed?" It may not be possible to fully resolve all the potential problems associated with co-ownership of property, but a skillful legal professional can at least help avoid unpleasant surprises in the process.
About the Author
The lawyers of Roberts & Roberts are Killeen attorneys providing legal services in the fields of real estate, probate, estate planning, and business law. If you need a Bell County attorney, we would welcome the opportunity to assist you. Please contact our friendly staff at your convenience.
Roberts & Roberts, LLP
CIRCULAR 230 DISCLOSURE: Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.