People often seek methods to pass on their assets upon death without the need for probate proceedings, and they prefer doing so without consulting a lawyer or creating a Will or Trust. Consequently, many decide to add their children as joint owners on their assets. However, this approach may not be the wisest choice, and there are more effective strategies to transfer assets upon death.
As individuals age, particularly following a spouse’s death, it’s common to add a child or children to financial accounts and property titles. This aims to ensure assets transfer directly to the child upon the parent’s passing, bypassing probate, and to facilitate asset management support from the child as the parent ages. However, making a child a joint asset owner can inadvertently expose those assets to risks. As joint owners, children can access and potentially deplete the accounts without the parent’s consent. Even trustworthy children could inadvertently expose the assets to their personal debts. If the child faces legal or financial troubles, these assets could be claimed to settle their debts, leaving the parent vulnerable to loss through no fault of their own.
Additionally, parents might intend for the jointly owned asset to be divided among siblings after their death. However, this plan can encounter obstacles. Legally, the surviving joint owner is not obligated to share the asset, potentially leading to unequal distribution if they choose not to honor the parent’s wishes. Moreover, attempts to divide the asset could be complicated by the federal gift tax, which imposes limits on the amount that can be given without taxation, currently set at $18,000 annually. If the division exceeds this exemption, it could trigger tax liabilities, further complicating the parent’s intentions.
Furthermore, joint ownership can have negative tax implications for the child. They might inherit the parent’s tax basis in the asset, which could be less advantageous than receiving a stepped-up basis upon inheritance. Additionally, adding a child as a joint owner could be considered a taxable gift, potentially necessitating a gift tax return if it exceeds the annual exclusion limit.
A more strategic approach to asset transfer involves estate planning, which offers various tools to achieve the parent’s objectives, including probate avoidance, without the drawbacks mentioned. For parents needing help managing their assets, establishing a Power of Attorney could provide the necessary support without risking asset security. Before adding children to assets, consulting with an attorney is advisable to explore the best strategies for achieving estate planning goals without jeopardizing the parent’s financial stability or unintentionally disinheriting some children.
