Why adding children to your bank account or home deed could be a bad idea
Article | March 01, 2023
BST & Co
Adding your kids to your bank account or home deed may seem like a simple solution to avoid probate and ensure a smooth transfer of assets after you pass away. However, this seemingly straightforward approach can create a host of legal, financial, and tax issues that can leave you and your loved ones vulnerable to significant risks and losses. While many people use these methods to simplify the estate planning process, experienced professionals typically recommend against them.
In this article, we will explore why adding your kids to your bank account or home deed can cause more problems than it solves and discuss alternative solutions to help you achieve your estate planning goals while avoiding unnecessary complications and risks.
Understanding the risks of adding kids to bank accounts or home deeds
Adding your kids’ names to assets can create several legal issues and risks. If your child has a creditor, legal judgment, bankruptcy, or is going through a divorce, adding their name to any of your assets (including a bank account or home deed) can potentially make your assets vulnerable to seizure.
It is also important to understand that adding your child to a bank account, for instance, doesn’t necessarily mean they are only entitled to half of the account; for legal purposes, they could be considered a full owner. Adding your child’s name to a bank account could give them the same rights as you to the entire account. Therefore, you risk losing the full asset, not just half the account, if your child faces legal or financial issues.
Loss of control and potential exploitation
Adding your children’s names to a bank account, deed, or any asset can lead to a loss of control. When you add someone else’s name to your bank account or home deed, you essentially give them legal ownership and access to your assets. This means they may be able to use your money or make decisions regarding the asset without your permission, leaving you with far less control over your finances.
Furthermore, adding your child’s name to a home deed gives them an interest in your home now, not just when you pass away. This means that they will have to agree to sell the house if you decide to do so, and they will also be involved in any closing. This can lead to a loss of control over your property, as your child may not always agree with your decisions regarding the home, leading to disagreements and disputes.
Adding your child’s name to your bank account or home deed could also result in a taxable gift. If your child withdraws funds from your bank account, it could constitute a gift if more than the annual gift tax exclusion. If you add your child to the deed of your home, the portion of the home they receive will be considered a gift. That said, the lifetime gift tax exclusion will probably cover the amount depending on the size of your estate.
More significantly, though, adding your adult child’s name to the deed of your home can have potential capital gains tax implications. When you add your child to the title of your home, they receive ownership in your home along with your basis for such portion. When they eventually sell the home, they may realize a capital gain on the difference between the sale price and the basis for that portion of the home.
For example, you bought your home for $250,000 twenty years ago. You add your child to the deed, and they receive $125,000 in basis (50% of the basis). They sell the home after you pass away for $600,000. They could realize a capital gain on the portion of the home gifted to them before your death. In this example, they could realize a capital gain of $175,000 ($300K - $125K).
The problem with the above example is not only that your child may have to pay capital gains tax, but your child loses the step-up in basis from inheriting the house. If the house is simply left to the child through inheritance, the child’s basis in the home will automatically increase to the home’s fair market value as of the time of inheritance. If they sell the home, they would only owe capital gains tax on the difference between the sale price and the stepped-up basis.
Adding your child’s name to your assets could result in Medicaid eligibility issues for you and your child. If you add your child’s name to your bank account or home deed, it becomes an asset of your child, which could limit their eligibility for Medicaid or any other needs-based benefits.
Moreover, if you need to apply for Medicaid to cover nursing home costs, Medicaid will scrutinize if you have given away money or assets to become eligible for benefits. Adding your child’s name to assets could be considered a gift, which may trigger a period of Medicaid ineligibility for you.
If you have multiple children, adding one child to your home deed may cause that child to receive a larger share of your estate than the other children. This can create resentment and disputes among your heirs, potentially leading to lengthy and expensive legal battles.
And, if your child passes away before you, the wording of the deed could determine what happens to their share of the house. For instance, if you are tenants in common, your child’s share of your home would pass to their heirs. This could result in you co-owning your home with your son or daughter-in-law, which may not be your intention.
Alternatives to Adding Kids to Bank Accounts or Home Deeds
There are several alternatives to adding your child’s name to your bank account or home deed that can help achieve your goals while avoiding the legal issues and risks associated with joint ownership.
Power of Attorney
A Power of Attorney is a legal document that allows you to designate someone to act on your behalf in financial or legal matters. You can specify the powers that your designated agent will have, and the document can be limited or broad in scope. This can be a good option if you want someone to be able to manage your finances if you become incapacitated, but you do not want to give them full ownership of your assets. It also makes your agent a “fiduciary,” meaning they would be obligated to act in your best interests, reducing the risk of abuse or exploitation.
POD or Totten Trust
A POD (Payable on Death) or Totten Trust is a type of bank account that allows you to name a beneficiary who will receive the funds in the account after you pass away. This is a simple way to transfer funds to your child without giving them joint ownership of the account or necessitating that they go through probate to access the account. The beneficiary designation can also be changed at any time, so you can easily update your plan if circumstances change.
A trust is a legal arrangement in which you transfer ownership of specified assets to a trustee, who manages the assets for the benefit of the beneficiaries. There are many different types of trusts that serve different purposes, but one option is a revocable living trust. With a revocable living trust, you retain control of the assets during your lifetime, but after you pass away, the assets are transferred to your beneficiaries according to the terms of the trust. This can be a good option if you want to avoid probate and ensure that your assets are distributed according to your wishes.
This article is intended to provide a brief overview of the potential risks and issues associated with joint ownership and various estate planning techniques. For more information on our estate & trust administration, click here.
The information provided in this article does not, and is not intended to, constitute legal advice. Instead, all information in this article is for general informational purposes only.
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