Some parents put some or all of their assets into their children's names while the parents are still alive for one of the following reasons: (1) tax reasons; (2) protection from nursing homes; (3) lawsuit protection; or (4) probate avoidance. So let's take a closer look.
Many parents mistakenly believe there is a tax advantage to giving $15,000 to their children each year. However, if their estate value is below the applicable exclusion amount ($11.5 million for 2021), their children can inherit their estate tax-free. In addition, if a parent donates an appreciated asset to a child, the child will be stuck with the parent's capital gains tax basis (carryover basis). But if the child were simply to inherit the appreciated asset, the child would benefit from the stepped-up basis. The bottom line on giving kids assets and taxes? Unless you have a substantial estate, there's likely no tax benefit to putting assets in your children's names while you are alive.
Yes, assets that you put in your children's names while you are alive are protected from your nursing home costs five years after you transfer the assets to your children. However, the family could lose those assets during those five years if one of the magical five D's occurs to your children: Debt, Divorce, Disabled, Death, or Dumb act. Then, you lose complete control over the assets that you put in your children's names.
Putting your assets in your kids' names may protect those assets from your future unanticipated lawsuits. But what if your kids' get sued after you place your assets in their name? If this transfer is made to avoid a known liability, a court may deem the transfer fraudulent and may reverse the transfer.
The price you will pay to give up control of all your assets may be costly. You may potentially miss out on the step-up basis that will apply to appreciated assets you own when you pass away versus the probate avoidance benefit that your heirs will achieve when you die. The revocable living trust may be a much better instrument to both keep control over what you have and eliminate your survivors from having to go through the court-supervised probate process.
We've seen a few folks benefit under the right circumstances by putting assets in their children's names when the parents have "more than enough " assets to live off of, and the parents want to see their children and grandchildren start enjoying their future inheritance. But, of course, the parents don't come anywhere close to divesting themselves of everything. Still, they get to see their descendants go through a "trial run" of the inheritance by putting a small percentage of their assets in the children's name while the parents are alive.
This post was written by MyAdvocate's team of estate planning attorneys.