Many parents, in planning their estates, add an adult child's name to the title of their home, bank account or other assets. This may not be the best approach to estate planning, and may have unintended consequences.
"Joint tenant" approach
The most common way to do this is to make the child a “joint tenant with full rights of survivorship." This means that when one joint owner dies, the other joint owner automatically acquires sole ownership of the property.
Theoretically, adding your child's name to the deed to your home or to bank accounts is a good move because it's a way to avoid probate. But doing so could create problems for you for a number of reasons.
Gift tax problem
If you make your child the joint owner of your home, for instance, the IRS could treat this transfer as a gift. IRS guidelines permit you to make a gift of $13,000 a year to one person (note that this is the amount you can gift in 2012). If the half interest in the home is worth more than $13,000, which in most cases it is, the gift tax provisions of the IRS code will be triggered and you will be subject to gift taxes.
Capital Gains Tax Problem
If the child receives a one-half interest in your home or other assets during your lifetime, the child's basis in that asset will be the same as yours. That means that the child will be liable for capital gains taxes on the entire increase in value of the asset. However, if the child receives the asset as an inheritance, the basis will "step-up" to its value at that time, and the child will not be liable for any capital gains tax.
Attacks by creditors
If your child has financial problems or develops financial problems at any time after you add his name to the title, his creditors may be able to place a lien on the house to satisfy the debt. Because you are joint owners, your child's creditors could only get at his half interest in the equity. However, if one of your child's creditor's levies on the house, it could be sold at auction, you'll be paid one half of the net proceeds, and the balance will go to pay down or payoff the debt. To avoid this, you would be required to purchase the one-half interest in your home from his creditors.
If your child is married and you transfer an interest in your home or bank accounts to her, it's quite possible that her spouse will have a marital interest in the property. If your daughter gets divorced, you may be required to buy her spouse out of his interest in order to maintain ownership of the house. He might even be able to force the sale of the house.
If your child is involved in an accident and is uninsured or under-insured and gets sued, the plaintiff in the lawsuit may be able to get a lien against your house. If this happens, you'd be unable to sell or refinance the property without paying off the lien. If the lien is sizable, it could potentially eat up all of your equity. If your house is free and clear, the judgment creditor could have the sheriff levy on the house. If this happens, the house will be sold and the net proceeds distributed to the judgment creditor.
Loss of control
If you add your child to the deed or financial accounts, you lose control of your property and your money. If you want to sell or refinance your home, your child will have to consent. Moreover, if you decide you want to remove your child from the deed, he will have to sign a quitclaim deed. If he refuses to sign it, you may find yourself embroiled in a legal battle that could cost you thousands of dollars.
When it comes to bank accounts, remember that joint account holders have equal access to the account. This means that your child could withdraw money from the account without your permission or knowledge. Now we'd all like to believe that our children would never do this, but I've seen it happen and it can wreak havoc on the parent's finances and on the parent-child relationship.
On the opposite end of the spectrum is the child who is so concerned about the parent's finances, that she begins policing the parent's spending. Whether or not your child's concern is justified, it's your money and you're entitled to spend it in any way you see fit.
A revocable living trust can help if you are disabled, and can avoid probate after your death
If one of your goals is to avoid probate, the best way to do it is to establish a revocable living trust. A revocable living trust is an agreement or contract between the settlor (the person who establishes the trust) and the trustee (the person who manages the trust). The trustee has a fiduciary duty to manage the trust according to the terms of the trust document and must not act in a way that would harm the trust or the beneficiaries of the trust. If you name yourself as the trustee, you will maintain control of your property during your lifetime and will also be able to provide for the distribution of your property after your death. You will also name a successor trustee who will take over management of the trust if you become incapacitated, or upon your death. You will have the ability to change the terms of the revocable trust or to revoke it in its entirety at anytime during your lifetime.
Consider the worst that can happen
As you can see, the choice you make could truly impact your home and bank accounts. In deciding whether to add your child's name to the deed to your house or to your bank accounts, it's important to consider the worst thing that happen – losing your house or your money because of your child's bad credit, negligence, or divorce, fighting with your child over your desire to refinance or sell the property, or having your child “borrow” money from your account without your consent. A little consideration and advanced planning will save you a lot of stress and heartache. Remember, estate planning requires prudence and practicality, rather than shortsightedness and sentimentality.
Getting an expert in your corner
Before making any estate planning decisions, it's important that you consult with an experienced estate planning attorney. Because there may also be tax consequences associated with your estate planning decisions, you should also consult with an experienced tax attorney.
Call me at 626-335-6884 for answers to all these questions for your circumstances.