A common will or trust alternative for an aged parent is “why don’t I just put my assets into my kid’s name.” After all, I want to “avoid probate” and I want to “make sure my children can access my assets in case I get sick.” Lots of older clients adopt this plan. However, just because a lot of people do something does not necessarily make it a good idea. Let’s point out a few problems with just putting your assets in your children’s names.
Mom is a widow and has two children, Bob, who is a commercial real estate broker in Phoenix, and Sara, who is a money manager in Chicago. Mom’s primary assets are a bank account that holds, among other things, the automatic deposit of her pension and Social Security payments. The bank account has a balance of $47,000. Mom also owns a small house in northeast Phoenix that is now worth about $255,000. Mom bought the house in 1958 with her deceased husband, Fred, for $17,000. Mom wants to “take care of things” so she decides to make a few changes.
First, Mom puts Bob’s name on her bank account as a joint tenant. So what happens? Bob gets sued on a bum real estate deal. He is now the subject of a judgment debtor’s examination and his creditors are asking him: “List every account that you are named or have an interest in.” He is listed as a joint tenant on Mom’s bank account. What happens? The creditor can try to attach Mom’s bank account that holds her pension and Social Security money.
Second, what else might happen if Mom puts Bob’s name on the account so that he can write checks and pay bills. Remember, Bob lives here in Phoenix while his sister is back in Chicago. The account has $47,000 in it and Bob is listed as a joint tenant. What happens to the $47,000 when Mom dies? Under Arizona Law, as the surviving joint tenant, Bob would be entitled to the entire $47,000 upon Mom’s death. Yes, Bob could gratuitously treat the bank account as Mom’s asset and pass a portion of it to Sara, but that would be left up to him. Otherwise, Bob can pocket the whole account and Sara would need to argue that Bob was named on the account for convenience only. However, the burden would be on Sara to prove this argument to a probate court, not exactly a way to promote family harmony.
Finally, as for Mom’s home in Phoenix, in order to avoid probate and health care claims, she places the house in joint tenancy between Bob and Sara. The house was bought for $17,000 and today it is worth $255,000. Mom dies and Bob and Sara decide to sell the house. They then file their income tax returns and find that they need to pay up to $59,500 in federal and state income tax. Since Bob and Sara received the house from Mom before she died, they also get Mom’s $17,000 income tax basis. Any sale for more than the tax basis will result in taxable gain.
So what should Mom have done? She should have signed a simple will passing her assets equally to her two children. If she wanted Bob to be able to pay bills for her, she should have named him her agent under a General Power of Attorney. As her agent, he would have been able to write checks and pay bills, but since he was not named as a legal owner of Mom’s account, the account is not available to his creditors. Further, upon Mom’s death, the account will pass equally to Bob and Sara.
What should Mom do with the house? The house could pass under her simple will or to avoid probate, Mom could sign a beneficiary deed. Upon her death, Bob and Sara will receive the house jointly. Until her death, Mom will remain the sole owner of the house. However, since Bob and Sara receive the house only after Mom dies, if Bob and Sara turn around and sell the house after Mom’s death, they should be able to sell the house income tax free.
As you can see, simple does not necessarily mean better. With a few easy changes, Mom can protect her assets, minimize any problems between her children after she dies and minimize an unnecessary income tax.