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It is common for parents to put their children’s names on their assets. While there are several reasons why this practice has become popular, it carries significant risks that should be addressed and understood.
Wayne von Borstel, Oregon financial Planner, Offers Advice
Wayne von Borstel is the founder and president of an independent financial planning firm, von Borstel & Associates Inc. The company maintains office locations in The Dalles and Portland, Oregon, and serves clients throughout the United States. Contrary to popular opinion, Wayne von Borstel urges his clients to avoid transferring assets into their children's names too early or without good reason. Parents often do not realize how much control they give up by doing so.
Claims by Creditors
If an asset bears the child's name, a creditor could put a lien on the parent's property if that child is unable to fulfill their financial obligations.
Wayne von Borstel illustrates this point with a poignant story of an 80-year-old client who did just that. His client lived in the home his great-grandfather built. He had lived there for much of his life, and raised his children there as well. The man put the property in his son's name because he feared that Medicare or Medicaid would take it away. Then, one day, the man was told by his son that he had to move. However, the reason had nothing to do with the fact that the man was old or incapacitated.
Instead, it was owing to the spending habits of his son and daughter-in-law. Because the couple could not pay their bills, the bank started foreclosure proceedings against the father’s property.
Snafus Regarding the Title
Putting a child's name on an asset, such as real estate, provides them with the same rights as the parent. Therefore, the parent cannot sell or refinance the property without the express consent of the child. You would think is okay but is amazing how often family members think differently about wealth, assets and even life!
Perhaps even worse, the child could sell their share of the property without the parent's permission. This scenario could put the aging parent in a vulnerable position without any control over their future.
Tax Liabilities
Another issue rarely considered by parents is the effect such a move will have on their child’s tax situation. The capital gains tax is one area where issues can arise because children lost the value of the jump up in basis at death. If inherited at the time of sale there’s no income tax if sold. If received as a gift when sold, the children would be liable for the capital gains tax as it relates to the interest they have in the home based on the parents' cost basis which oftentimes is substantially lower than current values. So the gift of the asset to children could create tremendous tax consequences.
Personal Liability Issues
Unfortunately, there are often personal liability issues when a party is grievously injured in a car accident. For example, a child whose auto insurance policy does not provide sufficient coverage to pay for the injured person's care could find themselves party to a lawsuit.
When a parent adds their kids' names to their assets, it leaves the property vulnerable to a lien or other compensation should this scenario occur. So every lawsuit, bankruptcy, divorce or bad personal decision by the child would affect the parent’s assets and possibly net worth significantly.
Divorce Court
Depending on the specifics regarding pre-nuptial agreements and other legally-binding paperwork, the child's portion of their parents' assets could be subject to division should the child and their spouse seek a divorce. To be equitable in their judgment, many courts across the country focus on dividing the divorcing parties' property in the most similar way possible.
As often happens in the case of a divorce, the opposing parties might need to agree with the inclusion of the property that a child technically shares with their parent. This leaves the property in a precarious position where the court could order it sold to satisfy the required division. As Wayne von Borstel notes, "every lawsuit, every bankruptcy, every divorce" affects those assets that the parent no longer controls. So, when financial troubles arise, or different beliefs are introduced, the chances of taking back that property are significantly reduced.
Wayne von Borstel earned his Master of Science degree in Financial Services from the esteemed Graduate School of Financial Services at the American College. In addition to being a proud member of the National Association of Insurance and Financial Advisors, he is also a valued part of the Portland Estate Planning Council and the International Association for Financial Planning, among other organizations.
Investment advisory services are offered through von Borstel & Associates, Inc., an SEC Registered Investment Advisor.
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