All the Reasons Why This Probate Ploy Isn’t a Good Idea

. July 27, 2020.
Image courtesy of riseofthemoors.com

If you decide to transfer any of your assets (ie. real estate, accounts, personal property) to one of your children during your lifetime,  after you die, if that child dies before he/she follows your wishes to divide the asset between your children, the asset transferred to the now-deceased child will be transferred to the deceased child’s  estate and any other children of yours may end up not receiving a share of that asset.

 

Dear Probate Attorney: I am a widow with four adult children. One of my sons is encouraging me to put his name on the title of my home and all of my investments claiming that if I do that, none of my assets will have to go through probate when I die. He said that upon my death he would divide everything equally with his brothers and sisters. The idea of avoiding probate makes sense to me. Do you see any problems with what he is suggesting? 

 

Probate Attorney’s response: What your son is suggesting might achieve the goal of probate avoidance, but it is not a good idea for a number of reasons. 

  1. When you make your son a co-owner of your home and investment assets, you will in effect have made him a gift of one-half of the value of those assets. The value of that gift which is in excess of $15,000 is a taxable gift which should be reported to the IRS through the filing of a gift tax return.
  2. When your son shares your assets, per your wishes, with his siblings after your death, he is in effect making a gift to each one of them and the value of each gift which is in excess of $15,000 will also be a taxable gift. Again, gift tax returns will need to be filed with the IRS.
  3. If after your death your son passes away BEFORE he shares the assets with his siblings, those assets will become part of his estate and your other children may end up getting nothing.
  4. If your son predeceases you, then all of the assets could revert back to your name alone and the assets will need to be probated upon your death. 
  5. If your son is married and goes through a divorce after you die, but before he divides the assets with your other children, those assets, titled in your son’s name, could end up as assets in his divorce proceeding.
  6. If you don’t prepare the deed properly when naming your son as a co-owner of your home, you could inadvertently create a tenancy in common rather than a joint tenancy with rights of survivorship. In that event, each of you would end up owning an undivided one-half interest in the home and as a result, your one-half interest in the home would need to be probated upon your death.
  7. Income tax advantages favor you retaining 100% ownership of your home transferring it to your children at the time of your death through an estate, as opposed to gifting it during your lifetime. Depending upon what you paid for the home and its fair market value as of the date of your death, the income taxes incurred on the sale of the home could be significant. Those taxes can largely be avoided if you retain ownership of your home through the date of your death and then have the home pass to your children through your estate, as the basis, or cost of the home, enjoys a stepped up basis to the value at the time of your death instead of the value at the time you purchased it, often many years ago.
  1. Once you name your son as a co-owner of your investments, he will have the ability to withdraw money and exercise control over those accounts at any time without your knowledge or approval.
  1. Because your son will become the legal owner of all of your assets upon your death, legally, he will not be required to share any of those assets with your other children. If he decides not to honor his promise to you to share the assets with his siblings, there is nothing that the siblings can do that will allow them to receive a share of those assets. 

 

Rather than naming a child as a co-owner of your assets, a trust can be prepared, as a separate legal entity which you retain control over during your lifetime, and you can then transfer your home and investment assets to that trust. Also, you could keep your investment assets titled in your own name and name the trust as the beneficiary of those investments upon your death. These methods will allow you to retain ownership and maintain control of your assets while you are alive, while avoiding probate costs and expenses at the time of your death. 

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This column is not to be construed as legal or tax advice and should not be relied upon as such. If legal or tax advice or legal or tax representation is needed, please consult an attorney.

Adapted from Jonathan J. David, Esq, Grand Rapids, Michigan. 

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