If you’re getting ready to start your estate planning journey, you might think that simply adding your adult children’s names to your accounts, real estate, and other assets is a smart choice. While it’s true that having an account with multiple owners can help to bypass the probate process, this can be a huge financial mistake that leaves your heirs with a huge tax bill later down the road.
According to Franklin, TN-based estate planning attorney Trent Linville, it’s never a good idea to simply add someone to your accounts as part of your estate secession plan. Instead, consider adding your assets into a trust.
Adding someone’s name to your account is risky business. Even if you trust your children, making them a partial owner on property, real or otherwise, means their creditors can come for this property. If your child gets divorced, for example, the value of property held jointly may be used in calculating their alimony or child support. Even though your son or daughter does not benefit from the property now, their ex-spouse may try and take a portion ofthe property that is rightfully yours.
Another major issue that the estate planning attorney points out is taxes. If your child is a joint owner in property, such as a stock or interest-bearing account, they will have to pay taxes on the capital gains whenever they choose to cash in their inheritance. Let’s say that you purchased stock in a company for $1000 20 years ago. That stock is today worth $100,000. If you cash this stock out today, you’ll be responsible for taxes on the gain of $99,000. The same is true of your heirs cashing out these types of investments upon your death.
There is a better way. The estate planning attorney recommends putting these assets in a trust. This triggers the step-up cost basis tax methodology. Essentially, these assets can be held in the trust, in their original value, for all intents and purposes, is their current value, not what you paid originally. So in this situation, your child can hold this investment for another few years and only pay taxes on gains realized at the time the trust was administered. If the total value is worth $101,000, then they pay taxes on the $1000 gain, not the $100,000 gain.
Something else to think about is whether or not you want to move in the future. If you put your child on the deed to your home, for example, you can’t sell the home in its entirety or refinance without their express written consent. More alarmingly, if you have a falling out with your child, they can sell their interest in your home or property without your consent.
Ultimately, you are not doing yourself or your beneficiaries any favors by tackling asset distribution on your own. To eliminate headaches, contact an estate planning attorney that can help you set up a trust or other endowment vehicle. Your attorney can identify the best course of action so that you can enjoy your money and property now, and your children won’t be saddled down with exorbitant taxes at the time of inheritance.
If you are looking for an estate planning attorney in Brentwood, contact Trent Linville today.