Spending Your Kids’ Inheritance – Part I

by Russ Mitchell

Although many people joke about trying to do all they can to spend their children’s inheritance – that is, spending money they have worked hard to save over the years – the reality is that when you die, there usually are a fair number of assets that you owned which must now be given to someone. You can’t simply take your wealth with you when you die. As the old joke goes: “How much did Howard Hughes leave when he died?” Answer: “All of it.” Unless you want to leave a legacy of confusion in your wake, it is wise to do some planning for what will happen to your “things” after you die.

There are many ways to make sure your bank accounts, real properties, or other personal assets are passed on to the person you want to benefit. One key factor in determining the right methods for transferring assets to your loved ones is a thoughtful consideration of the tax consequences for you as well as for the recipient. I will leave to those who comment on this article whether there should be taxes assessed on the assets transferred at your death, but, for now, sound tax planning is an issue.

Because there are many different ways to accomplish transferring your property from you to others, there is no “one-size-fits-all” plan that can be used. Depending on your own circumstances and the value of your assets, some methods may have more serious tax consequences than others. When trying to determine what will work best for you, it is a good idea to talk with an attorney experienced in estate planning. You may also want to consult an accountant. Even after you create a plan it is also worthwhile to review your plan every four to five years to make sure it still meets your goals and amend it as needed.

Because of the complexities involved, this material will be covered in three parts that will summarize some of the various mechanisms by which you may transfer assets to your children or others. These summaries are intended to serve as an outline of possible options to discuss with your attorney or accountant, and it is not an exhaustive list.

Joint Tenancy

You may decide to title your real property in joint tenancy, either with your spouse, one of your children, or a friend. When there are two people owning property in joint tenancy, the joint tenancy means that one surviving the other gets all of the property free and clear by simply recording an appropriate affidavit with the recorder’s office about the passing of the joint tenant. There is no court intervention (probate) required and, upon filing the affidavit, title to the property will be deemed to be in the name of the surviving joint tenant. This principle applies to real property, bank accounts, and vehicle titles. One of the drawbacks of this method in relation to real property is that the tax basis will generally be the purchase price paid by the joint tenant who originally purchased the property. This may greatly impact the amount of capital gains tax paid when the property is sold. Another drawback that affects an asset held in joint tenancy is that the property can be used to satisfy the debts of the person you add as a joint tenant, thereby putting your property at risk during your lifetime. There are other tax consequences that may apply to using this method to pass wealth from one generation to another. While there are many benefits to using joint tenancy as a method to transfer wealth, including speed and simplicity of transfer, there are common risks and tax consequences people do not consider, so you should be cautious, and well-informed, prior to using joint tenancy to transfer property from one generation to another.

This article is not intended to be legal advice. Receipt of this information does not create an attorney-client relationship.
IRS CIRCULAR 230 DISCLOSURE: In order to comply with requirements imposed by the Internal Revenue Service, we inform you that any U.S. tax advice contained in, omitted from, or implied by this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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