Thanks to our friend Rebecca Wrock, a partner at Varnum LLP, for contributing this article.
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A question I’m regularly asked as an estate planning attorney is whether someone should add their adult children as co-owners of their home to “keep things simple” and avoid probate. Often the inquirer knows someone whose parents planned this way and everything transferred from parents to children as seamlessly as intended. While this approach can certainly work for some families, more commonly it has the potential to introduce significant and often unexpected risks that may undermine your estate planning goals.
Exposure to children’s creditors and divorcing spouses. The moment a child becomes a co-owner, their share is generally exposed to their creditors. If your child is sued, files for bankruptcy, or divorces, their interest in your home may be subject to liens, judgments, or division in a divorce proceeding. Even if you have paid every mortgage bill and tax installment, the child’s legal and financial issues can entangle your property, force negotiations with third parties, or complicate future sales and refinancing.
Gift tax reporting requirements. Adding a child as a co-owner is treated as a present gift of an ownership interest. Depending on the percentage transferred and the property’s fair market value, you may need to file a federal gift tax return (Form 709). In 2026, a gift value in excess of $19,000 for a single person or $38,000 for a married couple needs to be reported. While gift tax is rarely due at the time of transfer because of the heightened lifetime exemption (in 2026, $15 million for a single person or $30 million for a married couple), gifts in excess of the annual exclusion amount reduce that lifetime exemption and can affect your overall transfer tax plan.
Loss (or reduction) of step-up in basis. If you retain full ownership until death, your beneficiaries generally receive a step-up in basis to fair market value, minimizing capital gains on a later sale. By contrast, if you add a child now, the child generally takes your carryover basis on the portion transferred. On your death, only your remaining share gets a basis adjustment. This partial step-up can significantly increase capital gains taxes for the family when the property is sold.
When death doesn’t occur in the expected order.If a child with a tenants in common interest predeceases you, the child’s estate will own that child’s share—requiring probate for the deceased child’s interest and possibly resulting in unintended joint owners (for example, the child’s surviving spouse or minor children) and complicating decisions about sale or occupancy. If a child holding joint tenancy with rights of survivorship predeceases you, their share simply evaporates back to you and nothing passes to the child’s estate. This result may inadvertently cut out that child’s own children from receiving that child’s portion upon your death. Both scenarios can frustrate family expectations and trigger disputes. Court is sometimes required to accomplish the desired outcome even if all parties are aligned and cooperating.
Thoughtful alternatives—such as a well-drafted revocable trust or an enhanced life estate (“Lady Bird”) deed—can avoid these pitfalls, preserve tax benefits, and keep control aligned with your goals.
Disclosures
This discussion reflects Michigan law and is a general overview, not legal advice. Appropriate planning is intensely fact specific. You should consult an estate planning attorney in your jurisdiction to tailor an approach to your objectives and circumstances.
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.