We have a lot of clients who ask us “Why don’t I just put my children on my home/bank account as a joint tenant to avoid probate?” While this method may, in fact, avoid the necessity of probate, it just might have some unintended consequences that you may not have considered.
Inability to control your assets
When you add a child or another person to your bank account or home, you make them a partial owner of that property. This ownership gives them control over your home and if you decide to sell or refinance your home, that child will have to consent to and sign on the sales documents. If they cannot or will not consent, then you can find yourself in an unintended legal battle with your child to allow the sale or refinancing of the property. Similarly, placing a child on your bank account gives them access to the account and the ability to “borrow” the money in your account without your permission, prior knowledge, or consent. While most of us would like to believe that our children would never withdraw money without consulting us first and would always abide by our wishes when it comes to the management of our property, unfortunately, family circumstances change and holding title in joint tenancy with a child may open you up to these problems.
When you add your child to your home as a joint tenant or add them to your bank account, you are, according to the IRS, making a potentially taxable gift to that child. Currently, in 2015, the IRS allows a person to make an annual gift of $14,000 to any person tax free. However, if the value of your gift is greater than $14,000 per year, per person, which would include almost all transfers of real property, then the gift tax provisions of the Internal Revenue Code are triggered, a gift tax return will need to be filed and gift taxes could be incurred.
Debts and Lawsuits
If your child finds himself owing debts to creditors or the subject of a lawsuit due to an accident or other event, those creditors may be able to attach your home in order to pay those debts or judgments and can potentially force the sale of your home to pay off your child’s debts.
Transferring your home to a married child may, if your child makes any contribution of community property funds to the mortgage, upkeep or property taxes on that home, give your child’s spouse a community property interest in the home. This community property interest would have to be resolved through a buy-out or division of property in family court in the event your child divorces.
While the establishment of a joint tenancy may be easy and quick, it may not be the best way to avoid probate of your assets. A better way to avoid probate is through the establishment of a revocable living trust. A revocable living trust allows you to maintain control over your assets during your life, avoids gift taxes, attacks by children’s creditors, and ensures that your property passes in a timely manner to your child upon your death.
In order to make an informed decision regarding the transfer of your assets either during your life or upon your death, it is important to discuss your options and the potential consequences of each with an experienced estate planning attorney before making such a transfer.