Putting Assets in Children’s Names

Many elderly people add one or more adult children to their bank accounts, or sometimes on the advice of a “helpful” bank employee, who has no idea of the negative side of doing this. First, if that child gets sued, or divorced, or in rare cases simply takes some of that money, it could be gone forever. That child can then write checks or transfer funds and withdraw most of the money. If there are two or more children, that can cause animosity between them. Upon your death the children on a joint bank account do not have to share with siblings, even if your will says everything goes equally.

Often people call about transferring their home to their children to protect it if long term care if needed. This is not eliminating risk at all. It is just transferring risk to your child or children. They may not be at high risk of long term care, but they can be sued, get divorced, or die themselves, and they cannot control or prevent any of those things. In addition, there may be tax advantages of having property in your name, or in a trust that has tax clauses that still treat the property as yours for income tax or estate tax purposes. For example, everyone in the U.S. has a $250,000 exemption for capital gains tax on the sale of their personal residence, as long as they have lived in it for two of the five years before sale. That is $250,000 per spouse, or $500,000 total. So a married couple who bought that home for $150,000 could sell it for $650,000 and not pay a penny of capital gains tax. But if it is in the child’s name, and the child does not live in the house, that child will pay big capital gains tax on sale.

A better solution would be to put some assts into an irrevocable trust that has provisions that still treat the parents as owners for tax purposes, even though the parents no longer own the house. That not only solves the possible tax problem, but it also protects the house in case either one or both parents need government programs to pay for long term care. There are downsides however, because to protect any asset the transfer must be done five or more years before Medicaid is needed, and three or more years before VA Aid and Attendance is needed . And of course, a big downside is that assets in the trust cannot be back to the parents from the trust. But it is far safer to give assets to such a special irrevocable trust because the trust does not drive a car, it doesn’t get married and divorced, it doesn’t get sick and need medical care, and if done right, the children cannot spend the money unless a non related person, called a trustee, decides to pay money to one or more children, with the parents’ permission.

In addition, such an irrevocable trust avoids probate. But just as trust vendors try to sell people trusts with the pitch that trusts “avoid probate”, what the vendors almost never say is that in Connecticut, it will not avoid the probate fee. That is because the probate fee is not based on property going through probate. It is based on the value of all assets shown on the inheritance tax return, whether or not they go through probate. For those people owning real estate, their heirs will not be able to sell that real estate until the tax return is filed, the probate fee paid, and a certificate of no tax is filed on the land records.

In short, there are often many ways of accomplishing the same thing, and both the pluses and minuses must be evaluated before a sound decision can be made. So get sound advice before transferring property, in order to avoid the pitfalls of having a trusted family member own what you worked for over a lifetime.