Should I put assets in my child’s name or in a trust?
The question of should I put assets in my child’s name or in a trust is a common one! We have a number of topics in this subject area that we are going to cover!
Problem 1: Exposes your assets to your children’s debts/creditors
One common problem with putting assets in the name of your children is it exposes your assets to your child’s debts/creditors and potential bankruptcy. If a child has a horrific auto accident or they have to file bankruptcy then the asset’s gone and there’s nothing that you can do. It can be for sale or it could have a lien on it.
Problem 2: What happens if your child gets a divorce?
Another potential problem is if you put it in a child’s name and they’re married, in a community property state, they can co-mingle the property with their spouse. If the spouse files for divorce they can claim your property as ‘community property’.
Problem 3: What happens if your child passes away?
Another problem is if your child dies suddenly your property would not necessarily go back to you. It would be divided between the surviving spouse and the children of the child.
Problem 4: Putting your homes title in child’s name
If you have your name and a child’s name on an account it shows as ownership not just as a signatory. This can cause problems within the family. I had a client that had his house in joint tenancy with his son. He had a son and a daughter and they were supposed to split the assets equally. It said that in his trust and his will, but the house title was in joint tenancy so when he died all the property went to the son. The daughter was left out because of the way he was holding title in his son’s name as joint tenants.
Problem 5: Capital Gains Tax
Another problem of putting assets in your kid’s names is if you buy a property, let’s say a real property, such as a house or something for $100,000 and now it’s worth $850,000. If you give that house to the child and your tax basis is that original purchase price then you’re exposing your child to capital gains. Now if you were to leave the property in your name and then you pass away, then your child gets a stepped-up basis under Internal Revenue Code Section 1014 and if the child sells it the next day then there would be no capital gain.
Problem 6: Loss of control of your assets
The next problem with putting it in your child’s name is loss of control. I have seen it happen where you have a reliable child and then they fall on hard times. If you put them on as an owner on the account or a signatory they can start taking money out of the account without your permission.
Problem 7: Child becomes incapacitated
There’s another problem of putting property in your child’s name. Say your child had a horrific auto accident, became incapacitated and needed extensive medical care such as medi-cal or social security or disability or government entitlement benefits. If they have assets in their name they are required to spend all those assets before going on the public assistance so it’s called spend down.
Problem 8: Son or daughter in-laws gaining control of your assets
Another unusual problem is let’s say you put your son or daughter on an account. If they became incapacitated then their spouse (your in-law) is now in charge of every asset that your child was in control of. Your child would no longer be in control. You would be at the mercy now of your in-law who might have malevolent intentions.
Problem 9: You will need your child’s permission to do certain things
Another problem of putting property in your child’s name is let’s say you want to move to another house, sell your home, downsize, want to refi and your child’s name is on there. You would have to get the child’s permission to do the refi. Also, if you were to sell it then your child could claim half the proceeds of the sale.
Problem 10: Taxable Gifts
There’s another problem when it comes to gifting property. If you gift over $15,000 a year per beneficiary or thirty thousand per married couple you have to file a gift tax return with the IRS. The amount above $15,000 would be considered a taxable gift. So if you gave a million dollar house to your son then a million dollars minus fifteen thousand is the gift tax to report.
Another problem of putting assets in the name of a child is that in California a child under 18 cannot own property greater than five thousand dollars without a guardian. This can lead to problems.
Are there any possible advantages to putting assets in your child’s name?
On the other hand there are some advantages of putting assets in your children’s name. If you are fairly well off, say if you’re single and have more than 11 million 2 hundred thousand or if you’re married and your assets exceed twenty three million four hundred then your estate tax inheritance tax will be less by the amount of the property that’s not in your estate.
So another idea is to think of yourself first. Your highest priority should be to have your assets available for your own care which makes sense. If it’s in your child’s name then you may not be able to get it back in times of need.
One more advantage of putting property in your children’s name: let’s say you’re getting older and you might need a skilled nursing facility that costs $6,000-$8,000 per month. You could file under medi-cal that would pay for it but you have too many assets so they want you to spend it down. If you transfer the assets to a child more than five years ago then you can still qualify for the public benefits without requiring the spend down of your own assets first.
To summarize, the main risks of putting property in child’s name are what I like to call the magical five D’s:
- The child’s Debt
- Divorce
- Disability
- Death or
- Doing a dumb act
So that’s the problem, some people say you should put the property in the child’s name to avoid probate. This is considered a poor man’s ‘estate plan.’ It’s not worth it with the high cost of probate and the delays that come with it. Putting assets in a trust is a far better option!
What other options do I have available?
Another alternative that’s not so good, but does work is you could give your child a power of attorney (general power of attorney) so the child can manage your assets, but they have no direct ownership. Since they’re only an agent on your assets their creditors cannot take those assets.
Another possibility of putting assets in the name of a child is a Uniform Gifts to Minors Act (UGMA). When the child is under 18 or 21 depending on the type of account and what state you’re in, those assets belong to the child and they can’t access the funds until they become of age. That’s frequently done and it’s one way to get around the rule that minors can’t own more than $5,000 of assets. There’s a potential downside, for example in my case, I put money aside in the Uniform Gifts to Minors Act and then when my daughter became an adult she went in and took $30,000 and closed out the account without any discussion.
Normally what most people end up concluding is that having a revocable trust is the best practice because it’s simple, it’s common and it’s well known.
Overall, I’d have to conclude that putting assets in a child’s name is not a good idea and I would not recommend it!
If you any questions regarding this topic, please contact Rex Crandell Firm in Walnut Creek, CA at 925-934-6320
