Can adding children’s names to property create problems?

By Attorney Truman Scarborough

Last month we looked at issues that should be considered before making outright gifts to children. Problems can also be encountered when children are made co-owners of property with the parent. In this article, we will look at these issues.

Parents add children’s names to accounts for various reasons. It may be so the child can access the account to pay the parent’s bills. Frequently, parents add their children’s names on accounts or deeds to avoid probate. The reason is when someone dies with assets titled just in his/her name without beneficiaries the asset is frozen. Probate is required to access the assets. No one can sign the deceased person’s name on checks, deeds, etc. A Power of Attorney does not help since it is effective only while the creator is living. It is similar to an employer – employee relationship. If an employer goes out of business there are no employees.

The Personal Representative (executor) cannot access the assets until he/she is appointed by the court. Throughout the process of collecting assets, paying bills and finally making distribution to the beneficiaries, the Probate Court must be shown that everything is proceeding as required by Florida Statutes and Probate Rules. The word probate essentially means “to prove.” When everything runs smoothly, formal probate takes around six months from the time pleadings are first filed with the court. There are attorney fees and court costs with probate. For an estate between $100,000 and $1,000,000, Florida Statutes suggest in formal administration a reasonable fee for the Personal Representative (executor) and the attorney would be 3% of the gross assets.

This leads many people to ask: “Can probate be avoided by adding children’s names to property?” Yes, jointly owned property with survivorship rights goes to the survivor. Unfortunately, this simple solution can create other problems: First, with joint bank accounts, the child has the ability to use the funds as he desires. Second, with real estate, there is a loss of control. Any further transfer will require the child’s signature on the deed. For example, a widow could add one of several children’s names on the deed to her home. But if later the mother wanted the home to go to all of her children, sell, or mortgage the property the child could refuse to sign. Third, the property will be exposed to the child’s creditors when held jointly with the child. Fourth, only one-half of the property will receive a “stepped-up basis.” In determining the capital gain on appreciated property, the basis (the original purchase) is subtracted from the sales price. When property is inherited at death, the date of death value becomes the basis. This reduces the capital gains tax when the property is sold. Fifth, adding a child’s name on the title to the home may delay the parent’s receiving Medicaid benefits. Sixth, with the home the parent may lose some of his/her homestead property tax exemption. Seventh, if the child dies first, the property will again be part of the parent’s probate estate.

With some types of assets, a Payment on Death (POD) or Transfer on Death (TOD) accounts may be used to avoid probate and not encounter these problems. Another option is the Revocable Living Trust which can be used with all types of assets and provides for incapacity.

 

For further information on estate planning, you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.

 

 

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