Easy Mistakes To Avoid When Transferring Assets To Your Child

People often dream of wealth. You work hard to earn money, save money, and acquire assets that have significant value. While you do this out of your own desire for a comfortable life, like most parents, you also hope to leave at least a little inheritance for your children. This is a wonderful thing to do for them, but a few easy mistakes can turn this beautiful gift into a financial nightmare. Fortunately, you can avoid making these simple mistakes when transferring assets to your child, ensuring that the legacy you intend to give them remains exactly what you envision. At Loughlin Law, P.A., our estate planning attorneys may be able to help you create or review an estate plan that avoids these and other mistakes so your children are not left to deal with unintended consequences while also grieving your death. Call (561) 677-8384 to book a consultation and discuss your Florida estate planning options.

Mistake #1: Failing to Fund or Update Trusts

Trusts are a popular and effective method of transferring assets to children and other loved ones. The flexibility that trusts offer makes them ideal for a variety of circumstances. However, if that trust is not funded correctly, it offers no asset protection and will not transfer assets to children as intended. This includes failing to properly transfer assets into the trust, incomplete or improperly executed trust documents, or overlooking Florida-specific legal requirements, such as FL Stat. § 736.1503, which provides that a community property trust must be signed by both spouses to be valid. Individuals can seek legal guidance to ensure their trust is properly executed and funded.

Additionally, failure to update the trust can also lead to significant problems in the future, as the trust may no longer reflect the individual’s current wishes or family structure. This problem can be avoided by conducting an annual review of the trust and updating it as needed. The trust should also be reviewed upon any major life event, such as marriage, divorce, birth, death, or a change in the financial circumstances of the individual creating the trust or any of the beneficiaries. This will ensure that the trust protects and transfers the assets as intended.

Mistake #2: Failing to Name or Misplacing Beneficiary Designations

Life insurance policies, annuities, individual retirement accounts (IRAs), 401(k)s, and certain other assets allow the owner to name a beneficiary as the method of transferring assets. When a beneficiary is named on such an asset, the asset does not go through probate and is distributed directly to the named beneficiary. However, when a beneficiary is not named, the asset will have to go through the probate process. Additionally, if an asset has a named beneficiary, the asset should not be placed in a trust. If an asset with a beneficiary designation is placed in a trust, the trust agreement will dictate the beneficiary’s rights, rather than the designation itself.

There are two simple ways to avoid these problems. The first is to designate beneficiaries on assets that allow them. This keeps those assets out of probate and allows the beneficiary nearly immediate access to the asset. If an individual does not want to designate beneficiaries or would prefer to place life insurance, annuities or other such assets in a trust, they can name the trust as the beneficiary. This will result in the asset being distributed to the trust upon the individual’s death, and the trust agreement then dictates how the asset will be handled.

Mistake #3: Leaving Assets Outright to Children

Cash or other assets left directly to adult children without structure may be depleted, sold, or otherwise used up quickly, particularly if those adult children are barely adults. When transferring assets to adult children, parents may want to consider using trusts to protect those assets and restrict how they are used to ensure their children do not waste them due to lack of maturity, responsibility, or other issues. Additionally, a trust can help protect those assets in the event that their children get divorced. Transferring assets directly to children may leave those assets vulnerable to being split in a property distribution in a divorce.

Transferring assets to minor children is another mistake parents may make. Like many states, Florida does not allow children under the age of 18 to directly inherit assets, including cash or real estate. Instead, the assets must be managed by an adult custodian or guardian. Using a trust is one way around this restriction, but parents may also want to consider the Florida Uniform Transfers to Minors Act (FUTMA), governed by FL Stat. § 710.111. This allows parents to create a FUTMA account in their name, the name of a non-transferer adult, or trust company and place cash or other assets such as stocks, bonds, real estate, fine art, and mutual funds in it for the benefit of a minor child. When the child turns 21 (or 25, if the transferor creates the account with the intention of it lasting until then), the account is transferred into the child’s name. However, FUTMA accounts may affect the child’s eligibility for financial aid and must pay annual income tax on earnings. Additionally, transferring assets into a FUTMA account is irrevocable, which means that the parent or donor cannot change their mind and reclaim the asset later.

Mistake #4: Overlooking Potential Tax Implications

Depending on the value of the estate, federal estate taxes, capital gains taxes, and other taxes may significantly reduce the wealth a parent wants to give to their children. Unforeseen tax implications could result in children being forced to pay a huge tax bill or sell assets to either pay or avoid the taxes. The reduction in value caused by taxes could also mean that whatever the parent intended the child to do with the asset may not happen. For example, taxes could reduce a cash inheritance enough that the parent’s intention that their child pay for college or buy a house is no longer possible.

The solution to this mistake is to work with a financial advisor or estate planning attorney to develop tax-efficient strategies for transferring assets. Some strategies to consider include gifting assets during the parent’s lifetime, setting up trusts, and using charitable giving to reduce the estate’s taxable value. One of the skilled Florida estate planning attorneys with Loughlin Law, P.A. may suggest the most suitable strategies for your estate.

Mistake #5: Not Taking Your Children’s Wishes Into Account

Many parents simply assume that when they are transferring assets to their children, those assets are welcome. Many times, this is true. However, sometimes an asset is not welcomed by the child. For example, a child may not wish to run the family business or they may enjoy traveling the world and do not want to be tied down to a piece of real estate. This can lead to conflict and disappointment, as children want to appreciate their inheritance but are not comfortable with it and parents are frustrated that their children are not more grateful for a freely given gift.

One easy way to avoid this is to have open and honest conversations with the children to understand what they do and do not want. Parents can explain how they currently envision transferring their assets, and children can explain why a particular asset may not be ideal for them. This can ensure wealth remains in the family by not giving an asset to a child who would quickly sell it, and allows the parents time to consider alternative options for transferring assets when the children’s wishes and theirs do not align.

Mistake #6: Not Discussing the Responsibilities of Owning the Assets

Particularly when transferring assets to young adult children who may not own many assets of their own yet, ensuring that they understand the responsibility of owning the asset they will receive is critical. If they do not understand the responsibility, or are not prepared to take it on, they may not manage the asset properly. Depending on the specific asset, it may be depleted or fall into disrepair which reduces its value.

Parents can avoid this mistake by discussing proper management of assets and providing specific details about managing the assets they plan to transfer to the child to ensure they can manage the asset properly. This also presents an opportunity for the child to ask questions or to explain why they may not be the right person to transfer a particular asset to. Parents can also use this conversation to gauge their child’s maturity, responsibility, and interest in managing the asset.

Mistake #7: Not Involving Children in the Family Business Early

If a parent is planning to pass on a family business to one or more of their children, an easy mistake they may make is not involving the children in the family business early. Then, when the parent dies and the children inherit the business, they are thrust into running it with no idea how it operates or anything else about it.

This mistake is also easy to avoid. Parents simply include the children in the family business early. This allows the children to learn how to run the business, ask questions while the parent is still available to answer them, and decide whether inheriting the business is what they want. If a child is not suited to running the business, it also allows the parent time to decide if they want to leave the business to another child or if they need to come up with another business succession plan.

Mistake #8: Not Distributing Assets Equally

When the children are children, parents know that things must always be equal, from how many slices of pizza each child gets to the number or value of their Christmas and birthday presents. The mistake they make in estate planning is in thinking that now that their children are adults, they can or will understand unequal inheritances. With assets of varying value, parents may think that if they give the children the assets they want, the children will not notice that one got a piece of real estate worth much more than the piece of jewelry another received. Alternatively, the parents may not know how to divide assets in a way that ensures each child receives an equal amount.

This mistake can be avoided by working with an estate planning attorney. A skilled attorney can assist parents in developing a proper plan to ensure they give equal shares to all their children when they are transferring assets.

How a Florida Estate Planning Attorney Can Prevent These and Other Mistakes

After working so hard all your life to amass your estate, you do not want to lose some or all of it to taxes, irresponsible management, or other mistakes when passing it on to your children. One of the knowledgeable Florida estate planning attorneys at Loughlin Law, P.A. may aid with transferring assets to your children with a carefully thought out estate plan that avoids these and other mistakes. We may also be able to assist you with other parts of your estate plan, such as establishing powers of attorney or drafting a living will. Call (561) 677-8384 to schedule a consultation in our Boca Raton office and learn more about how an estate plan can benefit you and your loved ones.