Placing Home And Accounts In Child’s Name May Be Mistake

FEBRUARY 1, 1999 VOLUME 6, NUMBER 31

When Vera Smith first came to our office, she was looking for help with her estate plan. She had heard about living trusts and knew that she wanted to avoid probate on her death, but wasn’t sure whether the explanations she had heard applied to her situation. When we inquired about her assets, she told us that she had put her daughter’s name on her home and her bank accounts. She had done this shortly after the death of her husband, “for convenience.”

What Mrs. Smith had done was quite common. She didn’t want her four children to have to go through much bother when she died, and she trusted her oldest daughter completely; she was surprised that we would counsel against the actions she had taken. In fact, she was seriously considering just changing the home over to her daughter’s name alone, since she had heard that nursing home care might consume her estate if she became ill in the future.

There are a number of reasons why it may be inadvisable, even dangerous, for people like Mrs. Smith to transfer property into joint names with their children, or to put property in a child’s name alone. The most obvious is the power that such a change gives to the child. Not only does the child have access to bank accounts and other liquid assets, but Mrs. Smith will be unable to sell her home (or borrow against it) without her daughter’s approval and signature. If she now transfers the home to her daughter’s name alone, she has given complete power to sell the house, encumber it with loans or even evict Mrs. Smith if she and her daughter later disagree, say, about Mrs. Smith’s need for nursing home placement.

Even if Mrs. Smith is justified in trusting her daughter so completely, there are still problems. Among the issues to consider before making such a decision:

  • If Mrs. Smith’s daughter were to declare bankruptcy, have delinquent tax problems, or get sued for an automobile accident, Mrs. Smith’s bank account and home might be affected. Even if Mrs. Smith was able to show that she still owned and lived in the home, she might incur substantial legal fees to prove her ownership.
  • Mrs. Smith qualified for property tax abatement because she is a widow (rules differ in each state). In her case, she lost that favorable tax treatment. As it happened, the property tax cost of placing her daughter’s name on the home was greater than the likely cost of probate of her estate, although the same might not be true in states other than Arizona. Of course, since her daughter owned the home, she should be paying the property taxes anyway, but they might be completely avoidable if Mrs. Smith simply kept the home solely in her own name.
  • Mrs. Smith’s gift to her daughter might require that she file a gift tax return with both the federal and state governments. She would not have to pay any tax, but the return still should be filed.
  • Upon Mrs. Smith’s death, her daughter may or may not choose to share the home and accounts with the other children. She might well decide that Mrs. Smith intended to leave the property to her, since she was the oldest and the one who lived nearby. If she decides to share the property, she will have to file a gift tax return herself, and may end up owing more estate tax at her later death because of her willingness to follow her mother’s wishes.
  • If Mrs. Smith takes her name completely off her home, when it is later sold the capital gains tax will almost certainly be substantially more than it would have been if she had owned an interest at the time of her death. This tax may be very large, particularly if Mrs. Smith has owned the home for a long time, and she survives her husband for many years.
  • If Mrs. Smith requires nursing home placement within the three years after the transfer, she may have made herself ineligible for government assistance with that care.

Mrs. Smith may ultimately decide that she is not concerned about the points we raised. She was surprised, however, at the complexity of the issues and the danger inherent in a simple set of decisions she had made “for convenience.”

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