20 Nov Boundaries are Good!
As parents, there are many areas in life where we need to apply wisdom. For example, we love our children, but we may not want to give them full access to our assets or finances. At Phelps Law, we’ve met quite a few clients who regretted adding a child’s name on titles to their house, or on bank accounts. We’re committed to helping you protect yourself, your assets, and most importantly, your children’s future; all good reasons to offer some sound advice about the subject of setting good boundaries in financial matters.
Misconceptions And Consequences
There are plenty of misconceptions that lead parents to include their child’s name on house deeds and other financial documents. We’d like to debunk three of those misconceptions and point out possible consequences if financial boundaries aren’t properly set into place.
- Avoiding Probate: Rather than saving money, avoiding probate by including a child’s name on a house deed could actually complicate matters. Primarily, your own wishes for the dispersing of your estate may be compromised, since the child whose name is listed on the deed also has a say in how the house funds will be handled. Second, if the child’s siblings decide to fight for access to monies, your children could end up in a divisive court battle. And finally, by adding your child’s name to your home’s deed, you’re actually giving them a complex gift. Putting a child on the deed is seen as giving a gift to them that may need to be reported to the IRS. And if the sale price of your house is much greater than the original price you paid at the time of purchase, your child may end up paying more in capital gains taxes for the difference between the two amounts. And in some states, that means probate charges could be less than what your child will pay in capital gains taxes.
- Saving Money: You may think you’re saving money by adding a child’s name to the deed of your house in order to avoid probate or inheritance taxes. But adding their name on your deed also means they become a co-owner, and as such, they would need to give consent, should you decide you want to sell your home. Moreover, if your child runs into financial trouble, or if he or she is in an accident that brings about a lawsuit, you could lose your house through a lien placed on property listed in their name. And if your child marries and then divorces, you could potentially become a co-owner with their divorced spouse. If the child is sued, goes through divorce, bankruptcy, or other unforeseen issues, mom and dad’s house and/or bank account are now exposed to the child’s problems. Adding your child’s name to your deed(s) or bank account could cost you hundreds of thousands of dollars in valuable estate assets or money.
- Easy Access: Giving your child or children easy access to your money may seem like a safeguard, but it actually removes accountability on their part and places a lot of responsibility on their shoulders they may not be equipped to handle maturely. You may find that giving them easy access is a high price to pay, through their financial irresponsibility.
The best method for handling assets is to create a revocable living trust. If the asset is properly titled in the revocable living trust, then:
- There is access to the account or asset during a time of disability to pay bills.
- The asset will pass to the right people in a fair manner when mom and dad pass away.
- The asset will receive the best tax treatment upon death.
- The asset still belongs to you, so it is not exposed to a child’s lawsuit, divorce, etc.
To avoid the consequences of cost, time, and family divisions, contact Phelps Law today to discuss how to protect your assets and benefit your children.
Images used under creative commons license – commercial use (11/20/2017) anthony kelly (Flickr)