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Money April 2017

Legal Ease

When Good Intentions Go Bad

By Jonathan J. David

What you are suggesting doing is what many older people do with their children in an effort to avoid the cost of engaging in estate planning, and because they feel it is a simpler approach and gets them to the same place. However, there are some inherent disadvantages in doing what you suggest.

Dear Jonathan: I am a widower and I have a relatively small estate. It basically consists of my home and its contents, a brokerage account, and a checking account I use for paying bills. I know all about the importance of engaging in estate planning and probate avoidance, but since I only have one child, I thought the easiest thing to do would be to add her to the title of my bank and brokerage accounts and my home. This would avoid the time and expense of having to prepare estate planning documents and since she would be on the title of those assets, nothing would have to go through probate. Am I correct?

Jonathan Says: You are correct that naming your daughter to the titles to your bank and brokerage account and your home will allow those assets to go to directly to your daughter at your death without having to go through probate – assuming that when you name her to those titles she is named as a joint tenant with full survivorship rights. In fact, what you are suggesting doing is what many older people do with their children in an effort to avoid the cost of engaging in estate planning, and because they feel it is a simpler approach and gets them to the same place. However, there are some inherent disadvantages in doing what you suggest, which include:

  • If you add your daughter to the titles of your assets, you will be deemed to have made a taxable gift to her. Under federal law, the first $14,000 of gifts made to any one person in any one calendar year are considered tax-free; the amount in excess of $14,000 is deemed to be a taxable gift. It is clear that giving your daughter 50% of your assets would exceed the sum of $14,000, and that amount in excess of $14,000 would be treated as a taxable gift. Even though this will not negatively impact either you or your daughter from a tax perspective, because you will be deemed to have made a taxable gift, you will be required to file a gift tax return with the IRS.

  • The bigger problem lies in naming your daughter to the title of the home, which will create a tax disadvantage for her at your death. Federal law allows assets which are titled in a person’s name through the date of death to receive a stepped up basis equal to the asset’s fair market value at the date of death. This is especially advantageous for homes and other real property which have a low cost basis but have increased substantially in value since the date of purchase.

For example, if the cost basis in your home is $100,000 and its fair market value is $500,000 at the time of your death, then its basis will be stepped up from $100,000 to $500,000 when you die – and if your daughter sells the home for $500,000, she would not incur a capital gains tax because there would be no profit to report.

If you put your daughter’s name on the title to your home while you are alive, however, a portion of the stepped up basis will be lost because you have in effect given her a 50% interest in your home and along with that gift, 50% of your cost basis will be transferred to her. As a result, when your daughter sells the home after your death, she will have a profit to report and she will incur a capital gains tax. Consequently, she would be better off if you retained sole title to the home through the date of your death and she receives the home from your estate/trust as your beneficiary.

Regardless of whether you add your daughter’s name to the title of your assets or not, you will still want to prepare both financial and health care durable power of attorneys naming your daughter as your agent and patient advocate so that she can act on your behalf in the event you are unable to do so. If you become disabled and do not have those documents in place, your daughter would have to petition the probate court where you live to be appointed your guardian and conservator; having those power of attorneys already in place would avoid having to involve the probate court.

I recommend that you at least meet with an estate planning attorney who can review in more detail the disadvantages of placing your daughter’s name on the title to your assets, as well as how engaging in estate planning can benefit both you and your daughter and avoid the pitfalls. Good luck.

 

Jonathan J. David is a shareholder in the law firm of Foster, Swift, Collins & Smith, PC, 1700 East Beltline, N.E., Grand Rapids, Michigan 49525.

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