Should You Add Your Children to Your Deed and Bank Accounts?

Tuesday, September 6, 2022 – Many people believe that an easy way to avoid probate and enable your children to assist you as you age is to add your children to your bank accounts and even the deed to your home. But this strategy doesn’t always work as planned.

Suppose your child causes a severe car accident. Your account can get pulled into your child’s lawsuit. When you place your child on your deed or bank accounts, you’re legally giving them partial ownership of your property. What if your son or daughter gets divorced or files bankruptcy? Their creditors can take your property.

 And how about taxes?

If you add your child’s name to your property as an estate planning technique, your child will miss out on a huge tax break called stepped-up basis at death. For assets valued at the date of your death, your heirs are taxed only on gains realized from the time of your death.

Adding your children’s names to property deprives them of the ability to qualify for the stepped-up basis. Although putting your child’s name on assets seems like a very simple and inexpensive estate planning technique that ensures your son or daughter receives your home when you pass, the scenario can cost more than you think:

You won’t be able to sell the home or refinance your mortgage without your child’s permission. Technically, though, your child could sell shares of the property without your consent.

• Claims from credit card companies, lending companies or liability claims stemming from an accident could put your home at risk if your child is named on the deed.
• When your child divorces, his or her property is equitably divided. If your child is on the deed to your home, the house will be subject to division by the court. Your child’s former spouse may be entitled to a share of your home.
• If your child files for bankruptcy, the court may be entitled to his or her share of your home, which can be sold to satisfy his or her debts.
• If your children sell the house after your death, they’ll likely incur a capital gains tax for the difference between your purchase price and the sale price.
• If your children fall on hard times, for example experiencing a job loss, health crisis or addiction, it can become quite tempting for them to dip into your bank account a little bit, and then a bit more and then a bit more — until nothing’s left. It has happened.
• If your child has a sudden health event and is left disabled or incapacitated, your money can be spent to help pay for care before Medicaid or disability benefits kick in.
• Adding your child to an account or deed may constitute a gift requiring the filing of a gift tax return with the IRS.
• If you have other children or family members, this is an almost guaranteed recipe for a family feud. How? Let’s say that, for convenience, you add your geographically closest child to your accounts. When you die, the entire bank account passes to that child, who isn’t obligated to share it with his or her siblings. If the child does share it, he or she may be required to file a gift tax return.

It happens quite often — a child’s ex-spouse or creditors take the parent’s property. But such scenarios are easily avoided. There are more effective estate planning tools to help avoid or limit your exposure to these situations. An experienced attorney can ensure your wishes are honored without the costs and risks associated with putting your children’s names on your deed and other assets.