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Things to Consider Before Adding Your Child to an Account
It’s rare that I advise my clients to add their child’s name to one of their assets (bank account, real estate, car, etc.) during their lifetime in order to save from probate (a court process designed to pay debts and transfer assets from a decedent’s name) and future tax consequences. For instance, let’s assume that you add your child’s name to the deed of your home. This means that they are now a legal co-owner of your house. Here are a few reasons why I advise my clients that this may not be a great idea:
1. It is no longer yours! Your child now has to consent to the sale of the home, to you taking a second mortgage or a home equity line of credit on the house.
2. Divorce. Should your child (and now co-owner) get divorced, their future-ex spouse may be entitled to a portion of the value of your house. And if they don’t have the liquidity to pay their spouse out of pocket, your house may be at risk of being sold to pay for the settlement.
3. Law suits. If your child gets into a car accident and is sued, their share of your house may be included as an asset in the settlement.
4. Creditor Difficulties. Just like a divorce, if your child falls behind on their bills, their debt could allow their creditor to lien your house.
5. Your child passes away before you. You could end up paying inheritance tax on the portion of the house your child owns. Or your child’s portion could be given to his/her heirs such as your daughter-in-law or grandchildren, depending on how the deed is written.
6. More than one child. Adding only one child to the deed means that your other children will have no right to the property upon your passing.
7. When you pass away your child may become full owner. He/she may only receive a step-up in basis on HALF of the asset. Let’s assume that you bought the house for $65,000. Before you pass away, you add your child as co-owner. When you die, your child becomes 100 percent owner of the house, which is now worth $165,000. Your child must pay both federal and state tax on half of this gain ($50,000), totaling approximately $15,000.
While this article provides real estate as an example, a majority of the reasons listed above hold true for bank accounts and other investments as well. Adding a co-owner may allow the beneficiary to avoid probate, and even reduce the inheritance tax owed, but there are much better strategies that allow them to eliminate the need of probate and minimize their liability associated with future capital gains tax, income tax and future inheritance tax. Before adding a co-owner to any of your accounts, contact us today to find out how we can help you achieve the best results for your family once you pass away.