Many people believe that naming a child as a co-owner of a bank or credit-union account will make payment of bills more efficient and will prevent probate. Or they believe that naming a child as co-owner on a piece of real estate or other asset will avoid probate. The problem here is that (1) co-owned assets always expose the assets to greater liability and loss (if your co-owner is sued, your co-owned asset could be lost in the lawsuit); (2) co-owned assets can result in capital gain taxes that would otherwise be avoidable; and (3) assets co-owned by one family member and not another often result in deep rifts in relationships and expensive litigation.
One story. Mom thought she would be nice, so she put the names of her four daughters on her deed to her residence.
She died. Daughters inherited her basis (the price she paid for the house 37 years before), so when daughters went to sell the residence, they realized a significant capital gain and a $24,000 capital gain tax. Arguments may be made that this tax can be avoided in this type of situation. But the tax (and probate) would–without question–be completely avoidable if mom had just kept the deed to the residence in the name of her trust.
Another grievous mistake is to believe that certain assets "pass outside of probate" and thus a trust does not need to be named the owner or beneficiary of those assets. For example, some well-meaning people believe that life insurance passes outside of probate and thus a trust does not need to be named the beneficiary of the life insurance. This is a serious mistake. Upon a person’s death, her life insurance passes outside of probate only if the named beneficiaries are competent, surviving adults. If the named beneficiaries are minors, for example, a court must order the creation of irrevocable trusts on behalf of the minors. (No insurance company will fork over $100,000 to a nine year old.)
Further, if all the named beneficiaries die before the insured (it happens), there will also be probate.
But more than all that, do you really want your life insurance proceeds going outright to your family or do you want to benefit your family by controlling the distributions of life insurance? If you want to control the distributions, then you should make your trust the beneficiary of your life insurance and then spell out in your trust how you want the insurance proceeds distributed.
And so it is with all assets, except cars (under certain circumstances). In addition, retirement plans pose unique challenges.
In brief sum, the best way to avoid this serious mistake is to retain us for advice in regard to "strategic asset titling": the consequences--emotional, probate, and tax consequences–of owning and transferring assets in various ways.
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