In response to the feedback that we are getting from our clients, we realize our clients want us to provide comprehensive and holistic planning advice as compared to product centered advice. Melissa and I are both Certified Financial Planners which means we are well versed on retirement income planning, investments, insurance, estate planning, taxes, Social Security, Medicare, debt management, and more. All of our new advisors coming into our firm will be required to either have the CFP or get the designation. We feel that it provides the knowledge one needs to provide proper planning. Two of the areas that clients are really interested in are estate planning and tax management. As a result, we are working really hard to provide useful information to you as our clients in these areas. One of the areas we talk a lot about with clients is some of their thoughts about putting their adult children as joint owners on bank accounts, investment accounts, or sometimes real estate such as their primary residence. In the case of bank and investment accounts, their thinking is I am going to put my child on the account usually for one of two reasons. Reason #1 for bank accounts specifically, they can write checks for me and handle financial matters. Reason #2 is if something happens to me, it avoids probate and the account just becomes my child’s. We caution clients in doing this for several reasons. Once you put anyone as a joint owner on the account, they are legally an owner and can do with the money in the account as they see fit. Mentally, you may feel it is solely your money but legally it is yours and theirs. They do not need to provide any legal justification for taking money out. Additionally, if your child were to potentially go through a divorce or legal situation, those assets could be subject to divorce or legal resolution, i.e. your money could be going to someone else. A better solution for parents if they want to maintain control but have their child assist is to keep the account in your name only but work with an attorney to set up Power of Attorney authority. By doing it this way, legally it remains your asset. With your child having Power of Attorney (POA) authority, they have to act as a fiduciary in your best interests. Reason #2 This can easily be solved by naming your child as a beneficiary through what is called TOD or POD (Transfer on Death or Pay on Death). Once again the money is yours until you pass away. Another reason we caution parents of putting children on bank and investment accounts is if you have more than one child and your goal is to pass on assets to your other children, if you have one child as joint owner with you and you pass, the account is that child’s solely and they are under no legal obligation to split it with their siblings. One last reason that parents are cautioned on putting kids on investment accounts is for tax considerations. Right now when one buys an investment in a non-retirement account, if the investment grows, when the person sells the investment, it is subject to capital gains taxes. The amount that is taxed is the difference between what you bought it for and how much you sold it for. This is called the cost basis. In some folks estate planning strategy, it may make sense to let kids inherit highly appreciated investments because the cost basis is increased or what is called stepped up to the value of the investment when the second parent passes away. If the kids are put on as joint owners, the step up could be eliminated and substantial capital gains taxes could be paid. Finally, with respect to real estate sometimes parents will either jointly put their children on the title of the house or in some cases solely put the children on the title. The rationale for this could be to avoid probate or in some cases trying to get the house out of the parents’ name in case resources are needed for Medicaid. The challenge with this strategy is like we discussed with other assets where kids’ legal challenges could come back on you, tax considerations with step up in basis, disinheriting other siblings, and other things. If a parent is concerned about Medicaid eating up the asset, a better solution may be to use an irrevocable trust. In closing, parents should really take caution before putting their adult children on banking and investment accounts, as well as, property. They really should talk to financial and legal professionals first to discuss the pros and cons of the different options. We like to tell clients there is no perfect decision. There are trade-offs and pros and cons between the different decisions you make. Please reach out to us if you have additional questions. |
