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Bankruptcy Can Spoil Your Estate Plan if You Deed Property to Children

As estate planning lawyers in Palm Springs, we frequently get asked by clients to prepare deeds transferring property to children. As we have previously discussed, using deeds as an estate plan is very risky and not recommended. A recent bankruptcy ruling in Oklahoma highlights this problem:

Whether for carpentry or estate planning, it is usually a good idea to use the right tool for
the job. Unfortunately, when it comes to estate planning and asset transfer, people are
often ill-informed about the tools available to them and the perils of choosing the wrong
one. If a parent wants to gift an asset to a child only upon the parent’s death or
incapacity, state law provides tools to accomplish that end. Unfortunately, use of the
wrong tool could unwittingly result in a present transfer and the unintended loss of the
asset.
In re Harrison (2013 WL 6859303)

A simple grant deed placing your child’s name on your house as joint tenants seems innocent enough. This will allow the property to transfer to your son or daughter upon your death without the need for probate. However, the consequences of this transfer are numerous. Technically, the transfer is treated as a gift for federal gift tax purposes. If the value of the property you are transferring is more than the annual exclusion amount, you will be required to file a gift tax return.

More importantly, that child is now an owner of the property with all the rights and obligations that comes with property ownership. If you want to sell the property you will need their written consent. You will not as easily obtain a mortgage on the property with a child co-owner. If the child has any debts or financial obligations the property may be used to satisfy those debts. If the child files for bankruptcy protection, then the property may be in jeopardy as indicated in the case above.

Preparing and validly executing a Will or Trust are much more appropriate means of estate planning. These instruments do not require the consent of any of your heirs, can be changed easily and will not place any of your assets in jeopardy.