Legacy Assurance Plan: Fans of Saturday Night Live during
the early 1990s will likely recall one of the show's most famous parody
commercials, "Bad Idea Jeans." The crux of the joke in this sketch is
that each idea the actors espoused was blatantly, obviously bad ... yet they
discussed them as if they were perfectly common-sensical notions. The
difference between good and bad estate planning techniques is often the exact
opposite of a "Bad Idea Jeans" commercial -- things that are
potentially very dangerous are often far from obviously bad; rather, they may
often appear to make perfect sense. With that in mind, here is a list of 3
ill-advised yet common estate planning techniques related to your home that may
seem like good ideas, but are really very bad ones.
(1) Adding your children to your
home's deed. One method some people use to avoid probate is simply adding
to the property's deed a child or other loved one to whom they would have left
the home in their will or trust. While this can effectively avoid the need to
probate that asset upon your death, this benefit will come at a steep price.
First, it exposes your home to any potential liability that may cross your
child's path. Whether it's a divorce, a failed business or an injury lawsuit,
any court judgment that is entered against your child could place your home in
jeopardy of being lost to that creditor. Even if your child is never sued, this
technique carries certain tax consequences. Adding your child to the deed is
actually a taxable gift in the eyes of the IRS and may require you to file a
gift tax return and/or pay gift taxes. Furthermore, this technique may have
very damaging capital gain tax consequences if your child later decides to sell
the property.
(2) Pocket deeds. This a
technique where you, as the owner, execute a deed transferring your home to the
person you want to receive it on your death. Instead of recording it, you
simply store the deed someplace secure and, when you die, your loved one
records the deed and takes possession of the property without the need for a
probate administration. Like adding children to a deed, this can successfully
avoid probate but carries numerous potential dangers. One is possible loss of
control. The person to whom you deeded the property is under no legal
obligation to wait under your death to record the deed. Legally, she could
record the deed, take possession of the property and demand that you leave
immediately... and be 100% within her rights. Also, the use of pocket deeds may
increase the risks for other future problems, like a cloud on the title of the
property, which may cause problems with obtaining title insurance. Furthermore,
this method can cause harm in terms of capital gain taxes. For calculating this
tax, the pocket deed will lead to your loved one having a smaller
"basis" in the home, meaning that her capital gain tax obligation
will be higher if she sells it.
(3) Transfer-on-death deeds. Transfer-on-death
(TOD) deeds are not universally bad ideas. There are several situations where
they can serve an essential role in an estate plan. In some other situations,
though, they have the potential to be problematic. Say, for example, that you
have several children and that your plan goals dictate that all of your
children take an equal portion of your wealth, including your home. In this scenario,
a TOD deed has the potential to generate more headaches than benefit. If you
name all of your children as co-beneficiaries on your home's TOD deed then,
once you die, all of them must agree in order to act. All of them must agree on
a realtor who will sell the property. All of them must agree on the sale price.
All of them should chip in equally to pay for the home's upkeep until it sells.
Even if all of your children are agreeable when it comes to decisions about the
home, securing consensus on all of these decisions can be a logistical hassle.
In this case, placing the home in a trust where decisions are managed by a
trustee you name might make more sense and save your children time and stress.
Legacy Assurance Plan (Summary): Estate planning, like any
form of planning, has a wide array of tools and techniques that can be used.
Some tools can be very helpful in some circumstances, and very harmful if used
in the wrong situations. Other techniques are almost always very bad ideas that
can have very dangerous consequences. For many people, the centerpiece of their
estate is their home. In order to make sure that your plan accomplishes your
true goals regarding your home and does so with the least amount of stress upon
you and your loved ones, it is important to make sure that your plan avoids the
potential pitfalls presented by using tools that are "bad ideas."
