By Lindsey Buchheit, Attorney
(SB) - In my estate planning practice, I am a huge proponent of making things as simple as possible. However, there are some strategies I see which, while extremely simple, carry extreme risk and often result in a financial and emotional mess. As with most things, when something looks too good to be true, it usually is. One of these things is adding a child to your house or bank accounts. Following are just some of the issues that can arise when you add your children to these assets:
- If your child has future financial problems or gets sued, your bank account is now subject to being garnished and your house may have a new lien against it.
- If your child finds himself in a divorce, his soon-to-be ex-spouse may make a claim for his half of your jointly owned asset.
- Once a child is a co-owner on a house, that child must agree upon the terms of a house sale. In addition, if your child dies before you and the house is titled with you and your child as tenants in common, a probate with the Court will need to be opened and your child’s spouse, children, or named beneficiaries in his Last Will and Testament become half owners of your residence.
- Adding a child to the title of your home can quickly complicate mortgage scenarios for the home.
- Adding your child’s name to real estate is treated as a gift, and your child will incur capital gains tax when she sells the house. To illustrate, if you purchased your house for $200,000 and add your child as a co-owner to the house, when you die, your child’s tax basis in the house is $200,000. If, by the time you die, the house has appreciated to $400,000, your child will owe capital gains tax of approximately 15-20% on the $200,000 gain. Conversely, if your child inherits the house, she’ll receive a “step-up” in the tax basis, meaning she inherits the house at a value of $400,000, thereby saving her from capital gains tax if she sells the home.
- In my seventeen years of practicing law, I can’t even begin to count the number of clients who come to me and state they’ve added one child as a co-owner on a bank account, trusting that this child will share the funds with her siblings. While this may play out as planned, there is simply too much risk. If your intent is for the bank account to be distributed equally to all of your children, keep the account solely in your name and name all of your children as payable on death beneficiaries of the account, or put the account into a Revocable Trust. This way, you maintain control of the account, are not exposed to the pitfalls discussed herein, and at your death, the account will be evenly distributed to your children.
- Adding one child to a bank account can put that child at a disadvantage from a tax perspective. Even if the child abides by your wishes and, at your death, shares the bank account with his siblings, that is treated as a gift by the child who was a joint owner of the account, and may require the child to file a gift tax return.
- The five-year look-back period for Medicaid planning includes the transfer of all assets. Many people add a child to their house, for example, in the hopes that this will protect their house if the parent goes to a nursing home. This simply does not work and is not worth the risks mentioned above.
In conclusion, when exploring your estate planning goals, it is admirable (and my preference) to not overcomplicate things, but you must also be smart and consider all possibilities before finalizing your plan. Keep it simple, but be smart.
The information contained above is for informational purposes only, and is not legal advice or a substitute for legal counsel. You should not act or rely upon this information.
