The “poor man’s estate planning” sometimes refers to the practice of putting your child on the title to your deed. The idea is that when you die, the property automatically transfers to the child without having to go through the probate process. However, this “poor man’s” estate planning can backfire and end up costing a lot more for the people you love. Here’s why and what you can do about it:
Risk #1 of Poorman’s Estate Planning: If the deed is titled with the name of parent and child (or any time there is more than one name on title and the parties are not married to each other) ownership of the property could be categorized as a tenancy in common – meaning that if one property owner dies, his or her interest in the property goes to an heir via probate, not directly to the other people on title. And probate is exactly what the poorman’s estate planning was trying to avoid.
Solution: The deed must state that the owners hold title as joint tenants with the right of survivorship or similar language. Even then, passing property outside of probate using a deed may create problems because if both joint tenants die or become incapacitated at the same time (such as in an accident) the property heads right into probate.
Risk #2 of Poorman’s Estate Planning: Putting your child on title can be categorized as a gift, thereby creating adverse tax consequences. One advantage of taking property at a person’s death is that the heirs take the property at a new basis equal to fair market value of the property. This may not happen if you’ve added your child to the title of the property if it’s determined that you made a gift of the property, your kids inherit your tax basis and lose valuable tax savings.
Risk #3 of Poorman’s Estate Planning: The property could be at risk if your child is on title and he or she is sued or has some other type of creditor issue, including divorce.
If you would like to learn more about strategies for protecting your assets and avoiding probate, call our office today to schedule a time for us to sit down and talk. We normally charge $750 for a Family Wealth Planning Session, but because this planning is so important, I’ve made space for the next two people who mention this article to have a complete planning session at no charge. Call today and mention this article.