Summary: Estate planning, like many
legal matters, is something where there are many ways to accomplish any given
goal. Just like meeting any legal, financial or medical need, there are
techniques that are safe and reliable, and there are methods that risky and
filled with potential dangers. There many techniques involving deeds that can
transfer real property without requiring probate, but some of them can also
cost you or your family thousands in taxes or, worse, cause you to lose the
property completely. By working with a knowledgeable estate planning attorney,
you can achieve your goals of avoiding probate without putting your home or
other property needlessly in jeopardy.
When have medical issues, we usually go
to a doctor to obtain treatment that we can trust is reliable and avoids risky
methods of addressing the problem. Consulting an attorney for a legal matter,
such as an estate planning need, works similarly. Your estate planning attorney
can help you go about addressing your need in a way that you can trust. This
type of help in planning can be essential because, for every trustworthy way to
meet your needs regarding avoiding probate or accomplishing other objectives,
there are as many unreliable traps that can ensnare your estate and your family
in a mess that may cost considerable time and money to fix or, worse, lead to an
outcome that is different from what you wanted.
With that in mind, here are a just a couple
risky probate-avoidance methods that are examples of potential traps that can
exist for you:
1. The
pocket deed. This a deed that you execute signing own your home or other
real estate to the person you want to have it upon your death. In a perfect
world, this method works because the deed doesn’t get recorded until you die,
so you are able to continue possessing that property until after your death.
Unfortunately, ours is not a perfect world. If, for some reason, that deed gets
executed during your lifetime, you could be thrown out of the property
immediately.
You could also lose the property if your
desired beneficiary gets divorced or is in a lawsuit and the other side
discovers that the deed exists. Even if none of these disasters happen, and the
property passes after you die, using a pocket deed can still cause your
beneficiary to lose valuable tax benefits (the so-called “step up in basis”)
and have a much larger tax bill if he/she decides to sell.
2. Adding
your desired beneficiary to your home’s deed. Some people seek to avoid
probate by simply recording a new deed on their home or other property listing
both themselves and their desired beneficiaries as co-owners of the property.
In that way, the beneficiary takes 100% ownership of the property when they
die.
This method is used much more commonly
than the pocket deed. A lot of writers have written about the potential
downsides of using this method and you may even already recognize this as a
risky way to avoid probate. But even if you do already know that this is
dangerous, you may not fully realize, at first glance, just how dangerous it can be.
Just like with a pocket deed, you have
the risk of losing the property if your beneficiary gets sued or gets divorced.
With this method, you can also create gift tax problems, since, if your
beneficiary paid nothing to you, the IRS views what you’ve gone as giving a
gift of 50% of the property. This means filing various tax forms and possibly
paying gift taxes.
In some states, if you still have a
mortgage on the property, adding someone to the deed can require you to pay a
certain type of real estate transfer taxes on one-half of the outstanding
balance of the mortgage. This can potentially amount to thousands of dollars in
taxes. Another massive problem that can arise after using this method in some
states is that it can cause your property to lose its homestead exemption.
Losing a homestead exemption can potentially raise your annual property tax
bill by thousands of dollars.
Also, adding your deed makes your
beneficiary more than just a silent co-owner during your lifetime. That person
has all of the same rights you do. You cannot sell the property, refinance the
property or take out another mortgage on the property without the approval of
your new “co-owner.”
This article is published by the Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services-company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at www.legacyassuranceplan.com.
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