Joint Ownership Gift to Child

07/25/2010

A common do it yourself estate planning technique is for parents to add an adult child's name to the title of their home, bank account or other assets. Is this really a good idea?

When a child is added as an owner on a parent's asset, it usually is accomplished by titling the property as joint tenants. This means that when one joint owner dies, the other joint owner automatically acquires sole ownership of the property.  For estate planning purposes, a parent sometimes uses this technique to avoid probate (because the asset is no longer solely owned by the parent).  However, creating joint ownership with a child may create other problems which should at least be considered, including:

  1. The Gift Problem.   If you make your child the joint owner of your property, there could be gift tax consequences.  For example, if you add your child's name to your home, you have just made a gift of 1/2 of the home's value to your child.  Current law permits you to make a gift of $13,000 a year to one person. If the value is over $13,000, a gift tax return probably needs to be filed (unless the gift is split with a spouse in which case the value has to be over $26,000). If a gift tax return is required, gift tax may or may not be due, depending on the value of the gift and the amount of any applicable credit you may have to offset the gift tax.  Because of these issues, you should consult with a tax advisor before adding a child's name to an asset.
  2. The Creditor Problem.  If a child's name is added to an asset and that child develops financial problems at any time after you add his or her name to the asset, his creditors may be able to get at the asset to satisfy the debt. Because title is held as joint owners, your child's creditors could only get at his or her half interest.  However, in the case of a house, it could be sold and one half of the net proceeds used to pay the debt.
  3. The Bankruptcy Problem.  If your child files for bankruptcy, there's a chance that you could lose the house. If the home has substantial equity, the bankruptcy trustee could sell the house to pay off creditors. 
  4. The Divorce Problem.  If your child is married and you transfer an interest in an asset to a child, it is possible that his or her spouse could develop a marital (ownership) interest in the property in the event of a divorce. 
  5. The Accident Problem.  If your child is involved in an accident and is uninsured or under-insured and gets sued, the plaintiff in the lawsuit may be able to get a lien against any transferred asset.
  6. The Loss of Control Problem.  If you add your child to the title of an asset, you may lose control. If the asset is a home and you want to sell or refinance your home, your child will have to consent.  If you want to remove your child from the deed, he or she will also have to consent. When it comes to bank accounts, joint account holders have equal access to the account. This means that your child could withdraw money from the account without your permission.

This is not to say joint ownership is always a bad idea.  The key is to identify your goals and objectives and then determine the best way to satisfy those goals and objectives.  If one of your goals is to avoid probate, perhaps a better way to achieve this goal is to establish a revocable living trust as opposed to joint ownership.  

Before making any estate planning decisions, it's important that you consult with an experienced estate planning attorney to ensure that your goals are being accomplished and other problems are not being created.