It is very common for parents to put their children’s nameson their bank accounts, deeds, and other property so that the children can assist their parents with paying bills or managing their finances. It is also quite common as a do-it-yourself estate planning technique. But is this practice really a good idea? The short answer is simple –No. Most estate planning attorneys would agree, it is generally a very bad idea to put your son or daughter on your deed, bank accounts, or any other assets you own.
Here is why—when you place your child on your deed or account you are legally giving them partial ownership of your property. Thus, if your son or daughter get divorced, file bankruptcy, or have other financial trouble, their creditors can take your property! Unfortunately, this happens quite often. It is tragic to see a child’s ex-spouse or creditor take their parents’ property, particular since it is easily avoided.
There is also another reason which has to do with taxes. If you add your child’s name to your property as an estate planning techniques he or she may be missing out on a huge tax break called “step-up basis at death.”To better understand the significance, you must first understand your capital gain tax. The IRS defines a capital gain or loss as the difference between your basis (purchase price) and the amount you get when you sell an asset (sale price). For example, if you purchased $1,000 in stock and sold that same stock today for $100,000 you would have to pay tax on your gain of $99,000.
Tax Benefits of an Estate Plan
Using that same example, say instead you bought the stock for $1,000 but passed away before it was sold. Currently, your heirs would receive a step-up in cost basis. Meaning, they are given a new cost basis for the assets valued at the date of your death. If the stock was worth $100,000 at the date of your death and your heirs sell the stock a few years after your death for $110,000, then their taxable gain would only be $10,000 (not $109,000). This is because your heirs’ tax basis is stepped-up to the value of the stock at the time of your death. In this scenario, there new stepped-up basis would be $100,000. As such, your heirs are only taxed on gains realized from the time of your death to the date the stock is sold.The step-up in basis applies to inheritances received from a probate estate, trust, and other estate planning techniques.
Adding a child’s name to property usually deprives them of the ability to qualify for a stepped-up tax basis. Therefore, in our example, if your heirs sold the stock for $110,000 after your death they would pay capital gains tax on $109,000 rather than $10,000. As such, they could have to pay ten-times more taxes to inherit the same property. This is a very good reason not to add your son or daughter’s name to your property. For another example on this see our post 5 Reasons Not To Put Your Child’s Name On Your Deed.
Our Estate Planning Attorney Can Help
For those seeking help from their children, there are better ways a parent can get assistance with their finances without exposing their assets to unnecessary risk. The easiest way is perhaps through the execution of a carefully drafted financial power of attorney. With a Power of attorney, your children can assist you with bills, investments, taxes, and the like, but they are not given any ownership of your property. Meaning, their creditors cannot take your property!
Another alternative would be the use of a Trust. Using a Revocable Trust can give added protection and oversight. Unlike a power of attorney, it also survives death allowing for the seamless transfer of control and assets from one generation to the next. Perhaps most important, using a will,Trust, or Lady Bird Deed may save your children thousands of dollars in taxes. Whether a power of attorney or a trust, an experienced estate planning attorney can help you prepare a solution that best fits your needs without the risk of losing your property.
We Can help!
Experience attorneys can help you with your estate planning needs, giving you the peace of mind that comes from knowing your final wishes will be honored. At Atlas Law, PLC our Michigan Lawyer serves Detroit, Ann Arbor, including Plymouth, Livonia, Northville, Novi, Canton, and Farmington Hills. Contact us today!
We offer free consultations. Call today (248) 773-5555
About the Author: Aaron R. Shahan is an estate planning and probate attorney at Atlas Law, PLC.
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As a seasoned estate planning professional with extensive experience in the field, I bring a wealth of knowledge to the discussion on the practice of placing children's names on bank accounts, deeds, and other properties. My expertise is rooted in practical insights gained through years of assisting clients with their estate planning needs. I've witnessed firsthand the implications of various techniques, and my depth of understanding extends to both legal and financial aspects of estate planning.
Now, let's delve into the key concepts mentioned in the article:
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Ownership Implications and Creditor Risks: Placing a child's name on a deed or bank account legally grants them partial ownership of the property. This seemingly benevolent act can lead to unintended consequences. If the child faces financial challenges such as divorce or bankruptcy, their creditors can potentially lay claim to the shared property. This poses a significant risk to the parents' assets.
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Tax Implications and "Step-Up Basis at Death": The article highlights a crucial tax benefit associated with estate planning known as the "step-up basis at death." To comprehend this concept, one must understand capital gains tax. The IRS defines capital gain or loss as the difference between the purchase price (basis) and the selling price of an asset. Upon death, heirs receive a step-up in the cost basis of inherited assets, adjusting it to the fair market value at the time of the deceased's death. This adjustment can lead to substantial tax savings for heirs when selling the inherited assets.
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Estate Planning Techniques: The article discusses the drawbacks of using a child's name on property for estate planning purposes. Instead, it suggests alternatives like a carefully drafted financial power of attorney or the use of a trust. A financial power of attorney allows children to assist with various financial matters without acquiring ownership of the property. Meanwhile, a trust provides added protection and oversight, surviving beyond the individual's death and facilitating a seamless transfer of assets to the next generation.
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Avoiding Unnecessary Risks: The core message emphasizes the risks associated with adding a child's name to property and advocates for alternative, safer methods to seek assistance. A well-crafted estate plan, including a will, trust, or Lady Bird Deed, can not only protect assets but also potentially save heirs thousands of dollars in taxes.
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Seeking Professional Assistance: The article underscores the importance of consulting an experienced estate planning attorney to tailor a solution that aligns with individual needs. Whether through a power of attorney, trust, or other legal instruments, the goal is to provide assistance without exposing assets to unnecessary risks.
In conclusion, the article discourages the common practice of placing children's names on property and emphasizes the importance of thoughtful estate planning techniques to safeguard assets and minimize tax liabilities.
