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“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 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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