By Myka Landry
It is not uncommon for aging adults to put their children “on the house” or “on the bank account” in order to avoid probate, provide asset protection, and allow one or more kids to write checks and pay bills.
However, many people don’t realize there can be significant ramifications to taking this sort of action. For example:
If a child becomes a co-owner on one of your assets, that gives them certain rights with respect to that asset. With a bank account, the child would have the right to withdraw all of the money. For real estate, that child would need to provide their signature and consent before you can sell your property or remove them from the deed. While this may not be a problem at the time the asset is transferred, it could create huge problems if there is ever a falling out in the family.When you add someone as an owner of an asset, you are making a gift of all or a portion of the value of the asset. If this amount exceeds the annual gift tax exclusion of $14,000 per year per person, you would have to file a gift tax return. You may not have to pay a gift tax, but there still could be tax consequences.Perhaps one of the most important problems with adding children as owners is that now your asset becomes their asset. If your child subsequently gets divorced, your asset may be included in the division of property. If your child were to get in trouble with creditors or have a lawsuit filed against them, your asset could be used to collect the debt or satisfy the judgment.Adding someone as an owner of an asset may also disrupt the execution of your estate plan. If you want to leave everything to your children equally, but you added one of them as an owner of a bank account, that child will get the bank account upon your death, regardless of what your will says. Assuming the child does “the right thing” and divides the money among the siblings, it becomes a gift from that child to their siblings – not an inheritance from you – and could be subject to the gift tax.If you give an asset while you are alive, the recipient of the gift gets your basis in property for capital gains tax purposes. For tax purposes, it would be preferable for the child to inherit the property when you die to avoid large capital gains taxes.
Although each case is different, transferring ownership of assets to children is not usually the best action to take. In most cases, a power of attorney can achieve the same goals. To make an educated decision for your situation, consult an estate planning attorney so you know the consequences of your choices.