Many elderly persons consider putting their assets in their children’s names to bypass probate. While there can be valid tax reasons to transfer some assets while you are alive, there are many reasons why this may not be a good idea.
Gifting assets to an adult child may create tax issues. Currently, when you give someone other than your spouse more than $17,000 in one year, you may need to file a gift tax return. Also, assets passing to adult children in probate or through a trust after your death are transferred to your beneficiaries with a stepped-up basis. In other words, a stepped-up basis means that your children’s basis for tax purposes would be the value of the asset upon your date of death. If you transfer appreciating assets to your children while you are still alive, your adult children will not be able to take advantage of this stepped-up basis rather they take the asset at your old basis which may be considerably lower. When they sell the property, they may have to pay significant capital gains.
Titling your assets in joint names with your adult children exposes your assets to their creditors. If your child is sued by a creditor, a lien may attach to your home, or the creditor may be able to access any financial accounts to satisfy the judgment against your adult child. There is also a possibility that the property may be considered a marital asset and be subject to division in the event your child is involved in a divorce proceeding. Moreover, if your adult child files for bankruptcy protection, the asset may be subject to the bankruptcy procedure.
If you have more than one child and you put all your assets in joint names with one of your children with a promise that they will share the assets with their siblings upon your death, there is no guarantee that your adult child will follow through with their promise. The assets would pass to the joint owner of the asset without probate and without a means for your other children to share in the asset without litigation.
If one of your goals is to avoid probate, you can establish a revocable living trust. A revocable trust allows you to serve as trustee and maintain control over the Trust property. As the name implies, the terms of the trust can be amended or even revoked while you are alive and competent. This is a popular trust used to avoid the probate process as the Trust property passes to the beneficiaries pursuant to the trust terms without need of court oversight in the probate process.
Please contact our team of experienced attorneys at Parnell, Michels & McKay, PLLC today to evaluate your estate planning needs and make a recommendation on what is appropriate in your circumstances and goals.