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Article Archives: 10/06/2004

Take My Advice and Stop Being a Loser

“You’ve won a new car!” Who wouldn’t like to hear those words, be it from Bob Barker or Pat Sajek, or like over 200 lucky audience members, from Oprah Winfrey? Mega-instant winners are raking in the goodies with monster home re-models, complete body makeovers and million dollar prizes. But when the bright lights fade and the TV cameras are gone, the winner can feel like a loser with an enormous tax bill.

A recent Wall Street Journal article pointed out the tax consequences these prize-winners face. Even someone in the lowest state and federal tax brackets who won a car on Oprah would owe an extra $6000 in taxes. If they were in the highest bracket, they’d have to shell out an extra $12,000. Even someone below the poverty level would lose $4000 in refundable tax benefits and have to pay over $1000 in taxes!

Few of us will ever win the lottery or reality TV show jackpot, but there are hidden tax consequences to the actions used to help our children or avoid probate. Every day well-meaning parents or grandparents take what seem to be innocent, yet generous actions without the slightest hint at the Pandora’s box they’ve just created.

“If I put my son’s name on the deed to the house, then he’ll get it right away when I die and avoid probate,” many reason. In the same way, a child’s name is added to CDs, bank accounts, brokerage accounts and the like. This is often done for estate issues. Those doing so don’t realize the tax consequences of their actions.

In the eyes of Uncle Sam, you just gave your child a gift. And that means you owe your dear Uncle some serious dough. For instance, put your son’s name on your home that’s valued at $300,000, and you just gave your son $150,000. That means you could owe Federal and State gift taxes equaling tens of thousands of dollars! The same goes for adding his name to your CDs or your brokerage accounts.

There are other tax consequences. When your son sold the house, he could owe capital gains taxes based on your cost basis—potentially losing tens of thousands of dollars more in taxes. Most of the time, these taxes can be avoided through proper planning.

There are other consequences to adding a child’s name to an asset. Doing so exposes that asset to the claims of the child’s creditors and to possible loss in a divorce! In the above example, if the son is sued or declares bankruptcy, the parents’ home could be lost, leaving them out on the street.

There are emotional consequences, too. I’ve talked to many widows who live in fear of their children kicking them out of their own home. When their husband died, it seemed like a good idea to add a child’s name to the deed. Now the relationship with the child is strained and the widow’s health is deteriorating. With the child’s name on the deed, the widow is no longer in control of her own home.

You may be saying to yourself, “I did that a few years ago and Uncle Sam hasn’t come knocking at my door. We don’t have to worry about that.” Tell that to the man I talked to who added a child’s name to the deed of his house almost ten years ago. Now the state is coming after him for $13,000 in taxes and penalties. Since many states are facing budget crisis, their pursuit of unpaid taxes has increased. They may not catch you right away, but there’s a good chance they will eventually.

There are better ways to avoid Probate without all the tax consequences. Gifts can be made in smaller amounts over several years. You can name beneficiaries on bank or brokerage accounts so that they avoid Probate yet don’t expose the asset to a child’s creditors. A Living Trust can be used for real estate and Powers of Attorney will provide for the management of your assets should you become incompetent.

So don’t lose money from hidden tax consequences of adding a child’s name to an asset. It’s too easy to accomplish the same thing without all the headaches.

Questions? Concerns? I’d be happy to provide clear, unbiased advice free of charge.

Mr. Voudrie is a Certified Financial Planner™ Professional and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN. For more information call 1-877-827-1463 or email jeff@guardingyourwealth.com.

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