If you have commercial holdings that you have no intention of selling, you’ve probably put a little thought into how these assets will eventually be passed down to any children or heirs once you’re gone. You may wonder if adding your children or heirs to your current title will make things easier for them after you’ve passed away. There certainly are some benefits to adding your children to your commercial title, but there are potential drawbacks you need to be aware of too. In today’s blog, we explore the benefits and drawbacks of adding children or heirs to your commercial title.
The Benefits Of Adding Children To Your Property Title
The following is general information. It is in your best interest to consult with a title company who can evaluate your individual situation and provide personalized advice before making changes to your title. No two situations are ever exactly the same, so what works for one party may not be ideal for another.
Depending on your situation, there are a few reasons why adding a child to your commercial title can be a smart move. For example, it may:
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Streamline Transfer - Property ownership can transfer sooner upon your passing instead of going through the probate process.
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No Business Interruption - By avoiding the probate process, the business associated with a commercial property can continue to function smoothly without interruption.
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Tax Benefits - There are some potential tax benefits to adding your child to the title if they are actively participating in the business. Again, consulting with a title service company or a tax professional is wise here.
Potential Drawbacks Of Adding Child To Commercial Title
Of course, there are also some potential drawbacks to be aware of when adding a child to a commercial title. Most notably is the possibility that they would lose their “step up basis” in regards to capital gains taxes. When a child is added to a title, they inherit the original purchase price of the property, which can lead to a much greater capital gains tax if they sell the property in the future.
For example, let’s say you purchased a property for $200,000 and now when you’re considering adding your child to the property, it’s valued at $500,000. If they received the property after your passing, they would receive a “step-up in basis,” which means that they would pay capital gains tax on a future sale on the difference from $500,000. If you add them to the title while you’re alive, they would pay capital gains tax on the difference between the final sale amount and the original purchase price of $200,000, potentially leaving them on the hook for a much larger tax bill.
Other potential drawbacks include:
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Loss Of Control - Named parties will have more say in certain aspects related to the property, meaning you will no longer have sole control over decision making.
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Target From Potential Creditors - If your child runs into financial difficulties, creditors may come after other assets that are in their name, including commercial properties they are named on.
Adding your children or potential heirs to a commercial title isn’t a decision that should be made lightly, but it could be advantageous depending on your individual situation. For more information on commercial titles or commercial property acquisition, reach out to the team at Commercial Partners today at (612) 339-2470.