One significant aspect of estate planning is transferring your assets to your children after your death. Usually, you will assign each asset to its recipient in your will, and your executor will carry out your wishes after you pass. However, many people might believe its easier to transfer assets to their children before their death.
Although there can be some benefits to that process, such as preventing the court from controlling your assets if you become incapacitated or avoiding probate, it can have serious ramifications. Gifting your assets to your children too early can result in complications in the future.
When you put your child’s name on an asset, they are now the legal owner of that asset. Whether it’s a house, a car, or a piece of furniture, your child now has the right to do whatever they want with that asset. This means they do not need to return it even if you ask.
Other scenarios may be divorce or bankruptcy. Your child’s spouse may try to claim a portion of your assets during the separation, or a creditor can take the assets during the bankruptcy process.
Gifting away your assets can lead to financial instability as you grow older. You may need those assets in the future, but you may not get them back.
While avoiding probate can be a good reason to gift your assets away early, it may still cause complications in the form of taxes. Gift and capital gains taxes can come into play, resulting in your children having to pay substantial amounts for the asset if they choose to sell it. When you gift your child an asset, it comes with a carryover cost basis, a value that determines the gain or loss of income taxes. This basis is usually what you originally paid for the asset.
For example, if you pass off a $500 asset to your child, which is now worth $1,000, your carryover cost basis is $500. This $500 will carry over to your children if they decide to sell the asset. They will have to pay $500 worth of capital gains taxes.
This kind of tax complication can be avoided by transferring your assets through a will. When your child inherits the assets, they will not have to pay capital gains taxes.
Consult an attorney
Estate planning can be a tricky process, but it’s a crucial one. While it might seem easier to hand off your assets to your children, you may come to regret losing ownership or cause financial problems for your family. Instead, work with a skilled attorney who can help you create a strong will and estate plan that appropriately protects your assets for the future.