Kathryn Gadbois Schafer, J.D.

Trust Relationship Associate

Adding Children’s Names to Assets – Don’t Do This Yourself

Parents will often add an adult child’s name to their bank accounts, home, and other assets, believing it will make it easier for the child to help them manage their finances and their property as they grow older. While this “do-it-yourself” approach is fairly common among aging parents, the truth is that adding your child’s name as an owner is often not the best choice for you or your child.

There are two main reasons why you should not include the name of a child (or anyone other than your spouse) on your assets:

It exposes you to unanticipated liability and risk.

It will likely deprive your child of an important tax break after your death.

When you add a child’s name to your deed, bank accounts, investment accounts, and other assets, you are effectively giving the child partial ownership of your property. In turn, if your child has financial troubles down the road (for example, owing money to the Internal Revenue Service, filing for bankruptcy, or becoming subject to a judgment), a creditor can place a lien on your property and potentially take it to settle the debt.

The same is true when children marry. If your child’s name is on your property and they later divorce, the ex-spouse could be entitled to a share of the property – your property.

Also, keep in mind that if you add your child’s name on your home or other real property, you cannot sell or refinance without your child’s permission, and your child may sell their share without you even knowing about it.

Rather than subjecting yourself to unnecessary risk, there are several other options to achieve your wealth transfer and asset protection goals other than simply adding your child’s name to your assets.

Tax Implications

If you add your child’s name on your property before you die, you also deprive your child of the “step-up basis” at the time of your death – an important tax advantage for your heirs.

The step-up in basis allows your heirs (which can include your children) to only be taxed on capital gains – the difference between the purchase price and the sale price – realized from the time of your death to the time the asset is sold. Here’s how the step-up basis works:

Say a father bought a home for $100,000 in 1995. The home is worth $300,000 in 2005, at which time the father adds his son’s name to the deed. At the time the son is included on the deed, he received one-half of the property’s value ($150,000). The son also received one-half of the cost basis, or $50,000 (one-half of $100,000). Upon the father’s death in 2005, the son sells the house for $300,000. The son then must pay capital gains tax on the $100,000 profit. Depending on the capital gains rate, the son could be faced with a rather hefty tax bill.

But if the father does not add his son’s name to the home in 2005, and instead, the son acquires the home after the father dies, the son will receive a step-up in tax basis for purposes of selling the home. This means the son will likely pay minimal, if any, capital gains tax on the profit.

It’s also important to note, adding your child’s name to an asset, for instance, to your bank account, could result in a reportable tax gift, if it is in access of the annual exclusion amount, triggering the need to file a gift tax return.

A Few Options

One alternative is to create a power of attorney. A power of attorney is a legal document that gives another person (e.g., your child) the authority to manage your bills, investments, real property transfers, taxes, and so forth. Most importantly, a power of attorney does not give your child any ownership interest in your assets. Therefore, if the child files for bankruptcy or gets divorced, creditors and former spouses cannot touch your property. Also, the document can be drafted using language that limits the scope of your child’s responsibilities and authority over your assets.

A trust is another worthwhile estate planning tool. With a trust, a fiduciary (the trustee, which can be you during your lifetime) holds title to property (the trust estate or trust property) for your benefit during your lifetime and for the benefit of another (for example, your child) after your death.

A trust survives the death of the person who created it (the settlor) and allows the transfer of assets from one generation to the next. If you want additional protection and long-term oversight of your assets, then a trust is highly recommended.

Whatever your net worth, asset transfers, asset protection, and wealth preservation must be properly structured (especially in high net-worth families and estates). If you have questions regarding your estate plan, your client centric team would be happy to work with you, your attorney, and your CPA to tailor the best plan to fit your individual needs.

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