Q: I want to have Mom put all of us kids on everything to avoid probate and to save property from nursing home expenses. This seems quick, simple, and basically a no-brainer. A number of my friends have done this and everything seems to work beautifully.
A: I have written about this subject before, but your point about putting names on things keeps coming up again and again.
If only one or two children are involved, and if there are no unexpected problems, then yes, probate can be avoided if assets are set up in joint tenancy with the children (not tenants in common) or transferred entirely to the children and taken out of your momÕs name. But, letÕs go through a long list of possible problems.
First, 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 safety deposit box. But maybe stop at that. As a safety net have a durable power of attorney in place.
A transfer means a loss of control and independence. Even if your mom truly agrees with such a decision, you might stop and ask yourself if you want to put her in that position. Furthermore, will everyone on title be as loving and generous as you intend to be?
Whenever a name is added, a gift has been made. If that personÕs share on all such transfers within a year adds up to more than $11,000, then either a gift tax return needs to be filed claiming an exemption 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.
Once a name is put on something, a transfer has been made. Even if asked, the recipient does not have to give it back by taking his or her name off. In fact, a gift is made when a name is removed and the same gift tax problems are faced but now by the other person.
When a name is added, 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 have the property sold through a foreclosure suit by only one "child." For non-real estate, the same can happen, but in some states, the assets, such as a stock or a CD, canÕt be handled or sold without everyone agreeing, thereby giving the dissenter leverage. Unfortunately, transfer agents and banks located in other states will not honor Colorado law.
If the gifted asset has appreciated, the recipient will take over the gifterÕs 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 gets 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. Also, for a house, the $250,000/500,000 tax exclusion for a principal residence could at some point be partially or totally lost.
What if one of the children unexpectedly dies first? Unless all the assets are retitled, that family line is excluded. Remember that assets held in joint tenancy or with beneficiary designations take priority over what the Will says. Everyone on title must agree and each person then might face gift taxes. If only one person refuses, changing has no effect because little remains which will be controlled by the Will.
Everyone on title becomes involved with everyone elseÕs life. Death, bankruptcy, divorces, law suits, etc. of one "owner" can have an impact on everyone else.
As for the nursing home issue, 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 and to its own three year rule after the transfer of the retained interest.
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 something is working for someone else does not mean you will have the same luck, assuming that what is being related has in fact worked.