Continuing with our previous post’s theme of “common estate planning pitfalls,” people are often unaware about unintended consequences when they decide to make seemingly small changes to their estate plan.
As noted in our previous post, he most common “do-it-yourself” modification we have seen is for people to add their children as co-owners of their bank accounts or real estate. Here are three more pitfalls that are associated with this seemingly simple modification:
Tax Implications:
Transferring ownership through joint ownership can have unforeseen tax implications. For example, when you add a child as a co-owner of real estate, they inherit your tax basis in that property. Your tax basis is the amount you paid for an asset like a home or a stock, and it is used to calculate your total gain or loss when you go to sell that asset. This means that if you bought your home for $100,000.00 thirty years ago, and it is now worth $500,000.00, your child’s basis in the property is still only the $100,000.00 you paid for it thirty years ago. So, when your child goes to sell the home after your death, they could be on the hook to pay capital gains taxes on that $400,000.00 difference from the home’s value when you bought it versus its value when they go to sell it.
On the other hand, if you had placed the home in a trust, for example, and listed your child as a beneficiary, their basis in the property would be “stepped up” to its $500,000.00 value on your date of death. If your child sold the home the next day, there would be no gain for which they could be taxed on. This means that they would receive the full value of your home as your gift to them, which you is what intended in the first place.
Estate Planning Complications:
Joint ownership can also complicate your estate planning goals. If you decided to place your home in a trust, you would need your child’s approval and for them to give up their ownership interest in the home before you could do that. It may also conflict with the distribution of assets outlined in your will or trust. Your child as co-owner of a home or bank account automatically receives full ownership of that asset when you, the other co-owner, pass away. That child then has no legal duty to distribute that home or that money to anyone else. If you have multiple children and only one is added as a co-owner, it can lead to family disputes and hurt feelings.
Medicaid Eligibility Concerns:
For elderly clients who may need to consider nursing home care and Medicaid planning, joint ownership of assets can impact their eligibility. Medicaid considers jointly owned assets as available resources. This means that, even though your child’s name is on the home or bank account, Medicaid will still count the whole value of that home or bank account as your asset when determining whether or not you are eligible to receive assistance or not.