Money - Are the Kids Risky Business?

When it comes to safeguarding wealth and assets, many parents consider transferring them into their children’s names. While this may seem like a smart move to minimize taxes or avoid future legal complications, it’s not without its risks. In fact, putting money or assets in your children’s names can lead to unintended consequences that may outweigh the perceived benefits. Here’s what you need to consider before taking the leap.

Note: The author is not a financial advisor and this article is not intended as legal or financial advice.

1. Loss of Control Over Assets

Once you transfer money or property into your child’s name, it’s no longer yours. Legally, they gain full ownership, which means they can make decisions about the asset without consulting you. If your child is young, their financial inexperience could lead to poor decisions, such as spending the money recklessly or mismanaging valuable property.

Even if your child is responsible, other factors—like a change in their personal circumstances—could lead to the asset being used in ways you didn’t intend. Divorce, debts, or disputes with business partners can expose those assets to risks that are entirely out of your control.

2. Exposure to Unforeseen Liabilities

When assets are in your child’s name, they become vulnerable to your child’s financial and legal obligations. For instance:

• Debt: If your child takes on loans or credit card debt, creditors could lay claim to the assets in their name.

• Divorce Settlements: In many jurisdictions, assets owned by one spouse may be considered during divorce proceedings, even if they were originally a parental gift.

• Lawsuits: If your child is sued—whether due to an accident or a professional dispute—assets in their name could be at risk of seizure.

What was meant to be a financial safety net for your family could quickly become collateral damage in someone else’s legal battle.

3. Tax Complications

Transferring assets to your children can have significant tax implications that may not work in your favor:

• Gift Tax: Many countries have thresholds for gifting money or assets. Exceeding these limits could trigger gift taxes, which you might have to pay out of pocket.

• Capital Gains Tax: If your child decides to sell the asset in the future, they could face capital gains tax on the appreciated value, potentially wiping out a significant portion of the wealth you transferred.

• Income Tax: Assets that generate income, like rental properties or dividends, could add to your child’s taxable income, leading to higher tax brackets or even tax penalties.

These tax issues can complicate what initially seemed like a straightforward financial strategy.

4. Straining Family Relationships

Money and family don’t always mix well. By transferring assets to one or more children, you could inadvertently cause tension or resentment among siblings, especially if the distribution appears uneven or unfair.

Additionally, if a child misuses or loses the assets, it could lead to feelings of disappointment or mistrust, damaging your relationship. Even well-meaning attempts to ensure financial security for your children can result in unintended emotional fallout.

5. Complications in Estate Planning

Parking assets in your children’s names before fully considering the implications for your estate plan can create complications down the road. For example:

• Unequal Inheritance: Transferring assets to one child early on might result in other children feeling shortchanged when your estate is divided.

• Inability to Reclaim Assets: If you later need the funds for medical care, retirement, or other expenses, reclaiming them can be legally and logistically challenging.

• Bypassing Your Intentions: Assets transferred early may not align with how you want your estate to be distributed later, especially if circumstances change.

Careful estate planning with the guidance of a professional can help you avoid these pitfalls.

6. Alternatives to Consider

If your goal is to minimize taxes or protect your assets, there are safer and more strategic ways to achieve these aims:

• Trusts: Setting up a trust allows you to transfer assets while maintaining control over how they’re used. Trusts can also provide tax benefits and protect assets from creditors or legal disputes.

• Joint Ownership with Rights of Survivorship: This can allow a smoother transfer of assets upon your death without the risks of an outright transfer.

• 529 Plans or Education Accounts: If your intention is to fund your child’s education, using dedicated accounts for that purpose is often more secure and tax-efficient.

• Professional Advice: Consulting with financial advisors and estate planners can help you tailor a plan that meets your needs while minimizing risks.

The Bottom Line

While it may seem like a good idea to park money or assets in your children’s names, the risks often outweigh the benefits. From losing control to exposing assets to unforeseen liabilities, this approach can create more problems than it solves. Before making any financial decisions, take the time to explore alternatives that safeguard your wealth while supporting your family’s future.

By acting thoughtfully and seeking professional guidance, you can ensure your assets are used as intended—without any unwanted surprises.