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| The Basics | Joint ownership with your child is risky
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Aging parents often want to name a child as a joint owner of a house or other property to avoid estate problems. It's not a good idea, lawyers say.
By Bankrate.com
Probate, according to Websters, is the act or process of proving before a duly authorized person that a document submitted for official certification and registration, especially a will, is genuine.
Probate makes a lot of people cringe, and theyll do just about anything to avoid it. The probate process can be time-consuming and costly. It also puts everything that transpires in court on public record for every Tom, Dick and Harriet to see.
One of the most popular ways parents try to avoid probate is by naming a child as joint owner of a property -- a bank account or house, for example.
Lawyers say this is a mistake.
Opens a can of worms
Laws vary by state but, generally, youll bypass probate with a joint ownership agreement. In combination with a joint bank account, it would make life easier for a child whos taking care of an elderly parent. But a joint ownership agreement opens up the proverbial can of worms, too.
The scenario thats the greatest risk is when a sole surviving parent puts one of several children on the deed to their house or a financial account, says Lexington, Ky., lawyer Michael Palermo.
The problem is they just made a gift of that property to the one child to the exclusion of the others. Usually, its done with the understanding that the daughter, or whoever, will split it with her siblings. That doesnt always happen. One kid can disenfranchise the others unless the recipient child voluntarily makes a gift to the others.
If the child does divvy up the property with the other siblings, that creates a problem, too, says Edward Koren, an estate lawyer with Holland & Knight in Lakeland, Fla.
As an example, Koren offered this: a parent has $100,000 in CDs in a joint account with Sally, a daughter who lives nearby. There are two other children. The parent tells Sally to divide the cash equally with her siblings. Sally is a dutiful daughter and transfers $33,000 to each of her siblings. But now shes made a gift that's potentially subject to gift taxes.
A potential solution would have been to put the CDs in a revocable trust with Sally was the trustee, Koren said. "Shed have a clearly defined duty to make payments, and there would be no tax consequence to her.
Tallying the tax consequences
Take a look at what happens to a child tax-wise when you make him co-owner of your house. Youre giving half the property to the child -- thats a gift. The gift is valued at half of whatever you paid for the house.
The child doesnt get a stepped-up basis on that half of the house. A stepped-up basis would bring the value of the gift up to its present-day value and would result in a far lower capital gain tax if the child eventually made a profit selling the house. Instead, when you die, the other half of the house passes to the child as an inheritance and the child receives a stepped-up basis on that half only.
Property held in joint ownership usually passes automatically, upon the death of one owner to the other owner. The person, presumably the child, becomes the sole owner and can do what he wants with the property.
The joint ownership supersedes a will, so even if the parent stipulates in a will that a particular property should be divided evenly among all the children, the surviving owner doesnt have to carry out those wishes.
Other nightmarish scenarios
Even if there are no other siblings, a joint ownership with a child can become a nightmare because of circumstances outside your control.
You may find your jointly held property at risk if the child is involved in a contentious divorce. The one thing that might save you in this situation, says attorney Palermo, is many states say property that is clearly identifiable as a gift isnt on the table in a divorce. Nevertheless, the potential is there.
If the child has credit problems, the creditor may go after the childs half of the property. Again, the creditors success may depend upon the state and other factors, says lawyer Robert Clofine of York, Pa.
But, as Clofine points out, even winning a case comes at a hefty price.
The lesson to be learned is somebodys in court over this and paying attorneys. Thats not something the mother wanted. The question is, what are you achieving by putting accounts in joint names?
By the way, even if your child has perfect credit and handles money in the most responsible fashion, his or her assets could be targeted someday because of an accident or some other catastrophic incident.
Sometimes the goal is to protect assets in the event the parent needs to go into a nursing home. Most states require individuals to pretty much deplete their assets before Medicaid will pay nursing home costs.
In all cases, the state will ask you if youve made any transfers of property in the last three years, says Palermo. That property will be counted as an asset for you. Theyll say, Well make you ineligible for as long a period of time where you could have paid for nursing home care with the property you gave away.
Thats not to say you absolutely cant qualify for Medicaid if youve put property into joint ownership within three years. There are exceptions and a good estate attorney can help you protect assets legally, Clofine says.
Medicaid is a national law, but its implemented by each state and each state has its own twist, and it changes all the time. The whole Medicaid law is evolving rather quickly -- new cases, new rulings.
Seek out the alternatives
Attorneys say there are many alternatives to joint ownership.
If you have a bank account you want to pass to a child and avoid probate, consider a pay-on-death designation or, in the case of stocks, a transfer-on-death account.
This is my account, whether with a bank or a brokerage, Palermo says. I can do what I want, but on the date of my death it goes to my child. The designation can be changed anytime and it doesnt go through probate.
Another option is a revocable trust. Assets pass seamlessly to your child. While youre alive, the assets are yours and are not subject to the claims of your childs creditors.
A house can be left to a child in a trust -- no probate, and the benefit of a stepped-up basis. The child would also get a stepped-up basis if the house is in a will, but wills are subject to probate.
There are other alternatives that a lawyer can discuss with you. No one thing is right for everyone. An estate attorney can analyze your situation and help you find whats best for you.
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