Month: December 2010

Giving Property to Children or Adding Them to Title

An extremely common mistake people make with regard to estate planning is the assumption that you can avoid estate taxes and probate simply by retitling your property in the name of your children or loved ones – i.e., giving it away.  Or, if you don’t want to give the property away, the idea of adding children as joint tenants or even adding them as joint bank account holders seems like it could solve the problem.

Don’t give your property away during your lifetime

Let’s clear this up.  It’s inevitable that at some point your property will not be yours any longer.  That is the nature of things.  But if you are reading about estate planning, chances are that you care about what happens to your property when you pass away.  And if you care about what happens to your property, you care that it benefits the people you want it to go to.

If you give your property away while you are alive, there are a number of risks that could strike.  First, there is the issue of taxes.  If you have held a piece of property for a number of years, it is likely that the property has appreciated in value.  If you die, your heirs won’t be taxed on how much your home has increased in value.  But, if you transfer your house to someone else other than your spouse during your life, when they sell the house they will be taxed on the difference between how much you paid and the fair market value at the time of the sale.

For example, imagine that you purchased a home 30 years ago for $30,000.  The house is now worth $330,000.  If you transferred title to your children during life and then your children sold the house, they would pay taxes on $300,000 worth of gain – or $60,000 when the capital gains rates are 20%.  If you transfer the house at death, the basis would “step up” to $330,000, so the gain and the tax would be zero.

Another obvious problem is that when you change title to your property, it is no longer yours.  If your children have money troubles, divorce or enter bankruptcy, their creditors could take the property.  The same problem exists if your children are joint tenants.

Don’t add children to your property deeds or bank accounts

The other common estate planning “solution” is to add children to bank accounts or as joint tenants (where property passes automatically upon death).  Although there are circumstances where this could be appropriate, those situations are rare.  You should consult with an estate planning attorney before retitling any of your property.

One problem with joint tenancy is that you have effectively given a share of the property away.  So bankruptcy, divorce and other creditor issues could arise even if your child is a joint tenant and not 100% owner.  If the child doesn’t have money to pay the creditors, it is possible that the creditors could have the house sold off to pay their debts.  You would get your half of the proceeds, but lose the house.

Joint bank accounts are another problem area, especially in families with multiple siblings.  In some families, a parent chooses one sibling as joint bank account holder.  This sibling then has the “expectation” to distribute the bank account evenly to the others when the parent passes away.

I wouldn’t want to be that sibling!  Not only is there potential income taxation on the entire bank account, there might be gift taxes on the transfer as well.  That is, of course, assuming that the sibling doesn’t just decide to keep the bank account for him or herself.  It happens.

The moral today is that you should not transfer title or add children to joint bank accounts for the purposes of estate planning without the advice from an experienced estate planning attorney.  While these transfers and changes might seem like a good idea at first glance, there are simply too many risks behind the scenes.

Having a Will Does Not Avoid Probate

Creating a will does not avoid probate!  The opposite is actually true: A will is a document that speaks directly to a probate court.  Probate is the legal process of transferring assets from your estate to your heirs.  This process is required whenever a death occurs and there is no other mechanism that automatically transfers the assets.  Those mechanisms can include beneficiary designations, “transfer on death” or “payable on death” designations, and marital property laws, to name a few.  In Wisconsin, if you have $50,000 or more of assets that don’t automatically transfer through such a mechanism, probate will be required.

So what’s so bad about that?  Probate has been described as “a lawsuit that you file against yourself for the benefit of your creditors”.  Even the most straightforward of estates can become cumbersome to the family and /or personal representatives during this process.  And, of course, the probate court charges a fee based on the value of the asset that are transferred.  AND, it’s a public court process so your creditors, or your kids’ creditors, or Nosy Neighbor Nelly can see who gets what when all is said and done.

Having said that, a will is better than nothing, since at least it provides direction to your loved ones about guardianship for your kids and where you want things distributed when you die.  Otherwise, the court gets to pick.  Also, there are lots of opportunities these days to use designations like the ones mentioned above to keep many assets from going through the probate process.

If probate doesn’t sound like much fun to you, there are common ways to avoid it, like setting up a revocable living trust and funding it with your property.

Bottom line: Get something in writing and make sure you know how/if it’s all going to work when you’re gone.  It’s pretty simple to do, and it takes a big burden off your loved ones.

No Estate Planning

If you have ever spun a roulette wheel, you know what it feels like as the wheel slows and the roulette ball finally comes to rest.  And you surely know that where the ball ends up is of its own making.

In many cases, estate planning is like calling your color and number, then walking over and placing your ball correctly without ever spinning the wheel.  It accomplishes your goals without any stressful uncertainty.

Most people in America, however, don’t have any estate planning.  Like roulette, if you don’t plan, you never know where the ball will land.  You don’t know that your wishes will be respected.  But there’s a big difference between not planning for your future and the game of roulette:  When you play roulette, you get to see where the ball lands, even if you chose incorrectly.  When you don’t plan, you never get to see what happens when the wheel stops because you have passed on.

Estate planning is about documenting your wishes so that when you become incapacitated or pass away, your loved ones will know how you wanted things to be handled.  State governments have also created default plans for people who have not documented their instructions.  In essence, if you don’t have a will or trust, the state makes one for you based on what it thinks is best.
Each state has its own rules for people who die without a will.  There are fifty different ways of handling the same issue.

So which one is right?  You are.  You are the only one who knows how you want your things to be distributed.

Will the state know who you want to raise your children?  Will it know which property or asset you want to go to whom?  What if you are remarried: Will your new spouse receive your entire estate, or will your children?

Sometimes the system works, and the ball falls on the right color and number.  But other times it doesn’t.  It is too easy to lose control over your assets and your property and your legacy if you let the state make decisions for you.

No estate planning is a large pitfall indeed.