Simple is Not Always Better

05/09/2011

It is not uncommon for people to say to me, "I have added my children on all of my bank accounts and I've also added them on the deed for my house, so I don't need a will or a trust, right?"

This type of estate "planning" is generally referred to as a "quick and dirty estate plan" and it is common.  Adding children to accounts and deeds may very well avoid probate, which is usually one of the main reasons people do this.  It may also give children direct access to cash to pay the bills of a parent who becomes mentally incapacitated.

Aside from the gift tax consequences this type of "planning" can cause, it can also lead to a variety of other problems:

  1. Your assets may be taken by a child's creditor or divorcing spouse. If your child gets sued or fails to pay his or her bills, then a judgment creditor may try to take all or part of your money and property to pay off your child's debts. There's also the possibility that your child's divorcing spouse will come after your money and property as part of the divorce settlement.

  2. Your children can wipe out your bank and investment accounts. As a joint owner of your bank and investment accounts, a child can withdraw all of your money if he or she is so inclined.

  3. Your children won't be able to sell your real estate. Even if you've added your children's names to the deeds for your real estate, they won't be able to sell any of the property without getting your signature on the deeds. While this may appear to be a good thing - they can't sell your house out from under you - it can become a problem if you were to become mentally incapacitated and some or all of your real estate would need to be sold to pay for your care but legally you would be unable to sign the deeds.

  4. You could cause an unequal distribution of your estate. If you have more than one child and you have not added each and every child's name to each and every account and each and every deed for your real estate, then your estate will be distributed unequally after you die. This will be true even if you have a Last Will and Testament that states that everything goes equally to the children. And even if your children agree to divide everything equally, they'll need to be aware of the gift tax consequences of divvying things up.

The bottom line - in the end, your simple estate plan may very well end up being a time-consuming and costly court case.