Oftentimes, people know just enough about estate planning to be dangerous. Frequently, we hear clients tell us that they have put their child or other family member on their financial accounts or property for a variety of estate planning reasons, ranging from convenience to probate avoidance to planning for incapacity.
Unfortunately, adding a relative to your financial account or real property can actually make an even bigger mess of things. A Transfer on Death designation, Trust, or Power of Attorney can often accomplish the same goal, without running into all of these problems.
1. You Lose Control
When you add someone on to your account, it is no
longer your account. It is now a joint account, with joint ownership.
Whomever you add has equal rights to any financial account, including
withdrawing it. Presumably your trust your child not to steal from you – but so
does every other parent who was unwittingly taken advantage of by their
children. And it might not be an outright theft, it may be something small,
like using your money to buy you something without your express permission
which you don’t want or need. Putting someone else’s name on an account means
losing full control over it.
2. Their Spouse Has A Say
Not only does co-ownership open yourself up to problems with your new co-owner, they also open up problems with the new addition’s spouse. Let’s say you want your only son to have your house after you pass on, so you add him on as co-owner. If you want to do anything with your house now, you not only have to have your son sign off on it, but you also have to have his wife sign off on it, too! This law is intended to protect a married person from being duped by their spouse and having their assets sold out from under them, but present some huge problems in our parent/child scenario. What if your son is going through a divorce? That house is now a marital asset going through their divorce proceeding. What if you want to sell your house? Now you need your son and your daughter in law present to sign the paperwork and consent to the sale.
3. HUGE Tax Implications
Most things we pass on to our children are something of significant value we have held for a long time, like a house, large CD, or a stock portfolio. These items are subject to capital gains tax when sold, because they have increased in value due to your smart investments. When you put a child as co-owner on one of these assets, their basis (i.e. base price) is the same as yours when you acquired it. So if you bought your house in 1980 for $100,000, and its worth $150,000 now, your tax basis is the $100,000 and your capital gains would be $50,000. Taxed at a rate of 15%, so your child is looking at $7,500 in capital gains taxes if he or she sells right after you pass on. If, on the other hand, your child inherited the house through a trust, beneficiary deed, or even probate (and not as a co-owner while you are alive), they received a “stepped up basis” meaning the basis is not what you paid for it, but the value at the time of your death. So, your child’s basis would be $150,000, and they sold it at that price, they would have no capital gains tax to pay.
4. The IRS Can Get Involved
Not only are you missing out on tax savings, you may have to do a gift tax return on your next tax return by adding a co-owner on your account. Technically, that is a gift, and you only have a $15,000 gift tax exemption per year. So if you add your child to your bank account with a $40,000 balance, you are technically gifting $20,000 and can get in trouble with the IRS for failing to report that.
5. No Obligation to Share with Siblings
Oftentimes the child who does the most caregiving is the one whose name gets put on your accounts and assets. After all, why would you put your 3 other children on there, when only one needs access? The problem becomes that when you pass on, that account is automatically then owned by that one child alone. This is true even if you put down the other kids as TOD beneficiaries. Both account owners have to be deceased before at TOD will kick in, and you have a living child as a co-owner, which is the superior claim. Ideally, your child will share the wealth with his or her siblings, but there is no guarantee of that. Moreover, we often hear of misunderstandings where the caregiving child believes that they are entitled to that asset alone because she or he took care of you and therefore deserves that money as compensation, or because they thought you wanted it that way.
6. You May Make A Bigger Mess of Things
Another problem is that adding a co-owner doesn’t
always result in the survivor owning the entire asset. Most bank accounts are “joint
tenants with rights of survivorship” meaning that, like in #5, when you pass on
the child whose name is on the account with you gets everything in the bank
account. However, a great many assets are owned jointly without the benefit of
survivorship rights in the parent/child scenario (unlike married couples) –
like houses. If you add your child as co-owner on the house, by default this
type of ownership is just a joint tenancy without survivorship rights. That
means when you die, your child doesn’t own your whole house, he keeps his half
and your half goes through probate to your heirs. So, if you have two kids, your
son ends up with 75% ownership and your daughter with 25% ownership – not what
you had planned on.
Joint ownership is rarely an appropriate way to accomplish
your estate planning goals. It almost always causes more problems than it helps
solve. Consulting an attorney to do your estate planning the right way, through
TODs, beneficiary deeds, or a trust, means that your assets will go where you
want them to without any of these complications.