Q: All my friends are putting their childrenŐs names on their assets to avoid probate and to make things easier for their families after they die. That sounds good to me-simple and inexpensive. Why donŐt you lawyers get off the Will and Living Trust band wagons and admit that all this estate planning mumbo jumbo is unnecessary when children are going to inherit anyway?
A: For transfers between husband and wife, having both names on assets in joint tenancy or as primary beneficiaries is the right approach, unless tax planning considerations point in a different direction. But let us briefly look at some of the reasons for not adding childrenŐs names, even for small estates and even though your goal is to avoid probate.
If a name is added to the title of an asset, a transfer has been made resulting in possible gift tax consequences. If that recipientŐs share of this transfer and all transfers within a year add up to more than $11,000, then either a gift tax return needs to be filed reducing the $1,000,000 gift tax credit, or approximately 50% of the amount above $11,000 might have to be paid to the IRS and the State of Colorado as gift taxes. (Yes, just for adding a name.)
Once a name is put on something, the receiver is an owner. Even if asked, the recipient does not have to give his or her share back. In fact by taking a name off the title, a gift is made back to the original giver and the same gift tax problems arise but now affecting the one removing his or her name.
Also note that the giver partially or totally loses control of the asset. For real estate, it could mean that Mom is forced to pay rent, be evicted, or face having the property sold through a quiet title suit. For non-real estate, the same consequences involving real property can happen, but in some states, the assets, such as a stock certificate or a CD, can not be administered or even sold without everyone agreeing, thereby giving the dissenter a great deal of leverage.
If the gifted asset has appreciated, the recipient will take over the gifterŐs basis (what was paid) and thus would have to pay the same capital gains tax as the giver. If the asset was inherited, the recipient receives a "new basis" amounting to the value of the asset at the date of death, thus paying no tax if the asset was sold at that value. Thus for income tax purposes it is normally better to inherit appreciated property instead of adding names to title. Also, for a house, the $250,000/500,000 capital gains tax exclusion of a principal residence could at some point be partially or totally lost by adding names to the deed.
What if one of the children unexpectedly dies first? Remember that assets held in joint tenancy or with beneficiary designations take priority over what the Will provides. Unless all the assets held in joint tenancy are retitled, the deceased joint tenantŐs family line is excluded. Everyone on title must agree to change back ownership to include the deceasedŐs family line and each person then might face gift taxes. If any one on title refuses to cooperate, undoing title to make sure that the descendants of a deceased child receive their percentage share becomes impossible.
Notwithstanding the foregoing, everyone on title becomes involved with everyone elseŐs life. Death, bankruptcy, divorces, lawsuits, etc. of one "owner" can have an impact on everyone else.
Regarding nursing home issues and Medicaid qualifications, although it is true that the three year rule starts running at the time of the gift (when the name or names are added), the share retained by the giver is not affected and is still exposed to such expenses or Medicaid qualifying problems.
As exceptions to the general statement that the children should not be added as owners, I would agree that it makes sense to add a name or two to the checking account and to the signature card of the bank safe deposit box. But maybe stop at that.
Finally, "probate" in Colorado using an attorney will cost around $2300. If the family does not use an attorney, then the costs and fees are less than $300 using unsupervised administration. So know what you are trying to avoid before you go off the deep end. And just because adding the childrenŐs names to assets apparently worked for someone else does not mean it will always work out the same way for others. You need to weigh your familyŐs situation with the real risks involved.