Adding Children to Title of Real Property or Other Significant Assets May Create Problems
People often have their own ideas of the easiest way to pass on their homes or other property to their children when they pass away. Later on, they may seek the services of an attorney to help them prepare a more comprehensive estate plan, such as a Revocable Living Trust.
It is not that unusual for us to see clients who have previously added their children to title to their home and other property or assets. For some, it seems a logical way to ensure their intended children will receive valuable real estate assets upon their passing while avoiding the delays and costs associated with probate. Usually, however they are not aware of the problems that can be created when they add children to title to their assets.
These problems can include:
- Loss of control over your own property if a child disagrees with something you wish to do with the property.
- Exposure of your assets to potential creditors of your child, including the case of a child divorcing.
- Loss of important tax benefits your child would realize if they were to inherit from you rather than being placed on title during your life.
Often during consultations with an estate planning attorney, such clients will be advised to return the properties back into their name alone, so that they may be transferred into a Revocable Living Trust.
The benefits of doing this are:
- You maintain full control.
- Your children’s current and future potential creditors cannot threaten your assets.
- Your children will receive maximum tax benefits when they inherit from you, which would be unavailable if they already own it with you when you pass away.
An often unknown tax law comes into play whenever you add children to valuable assets or they give valuable assets back to you. It is known as the “Gift Tax.” If you gift anything to your children or anyone else other than a spouse, you are required to file a gift tax return if the amount exceeds $14,000 to any one person. If you fail to file this return (IRS Form 709), and the IRS discovers it they are likely to impose a tax on you of up to 40% of the amount of the gift over $14,000, in addition to interest and penalties.
Point and Recommendation: If your children are going to be quit-claiming their interest in your property back to you, in order to receive it on a more tax favorable basis later as an inheritance, we strongly recommend you review this with your accountant or CPA.
The same procedure should be followed if your child went on title with you at the time the property was purchased.
Remember to speak with your estate planning attorney regarding your various options.