Estate planning truly is the ultimate gift for your loved ones, and a comprehensive estate plan should always include a review of the titles and beneficiary designations for all assets to ensure they are consistent with your estate planning objectives. Otherwise, unintended consequences may ensue. Real estate, in particular, can be the cause of serious family conflict when not handled properly with your estate plan.
After many years of witnessing the disastrous consequences of poor estate planning, here are three common estate planning mistakes made with real estate that you should avoid within your own estate plan whenever possible:
- Naming Direct Beneficiaries on All Assets Other than Real Estate: As a probate attorney, I have witnessed this troublesome scenario on numerous occasions. If you own real estate titled solely in your name (or titled as atenant in common) upon your death, then that real estate interest will need to go through the probate process before it can pass to your beneficiaries – even if you have a Will in place. On average, the death probate process in Wisconsin will take about 11 months. In the meantime, before your real estate can be sold or distributed, your estate is responsible for paying maintenance expenses including, but not limited to, real estate taxes, insurance, utilities, maintenance and general upkeep of the property. Your estate is also responsible for your final debts and expenses, including your funeral bill, court costs, and attorney’s fees. If you have insufficient cash available within your estate, then your children or other beneficiaries will need to find a way to pay these costs. However, they are under no legal obligation to pay these costs from life insurance proceeds, cash received through POD designations, etc. Thus, a serious dilemma… Therefore, if you own real estate that will go through probate upon your death, it is generally advisable to also allow your cash accounts and/or life insurance proceeds to go through probate as well in order to eliminate situations such as the one described above.
- Naming Multiple Beneficiaries on a Transfer on Death Deed: Wisconsin law now allows a special type of deed known as “Transfer on Death Deed” or “TOD Deed” for short, and similar to a “Lady Bird Deed” in other states. Through this type of deed, you can designate a beneficiary or beneficiaries who will inherit your real estate outside of probate upon your death. If you have only one child who is a responsible adult, and who is not a special needs individual, then this strategy may work well. However, if you have multiple beneficiaries, then a Transfer on Death Deed is most likely not a good option. If multiple individuals own a single piece of real estate, they all must agree on the realtor and the sale price, and until the property is sold, all owners should contribute equally to the maintenance of the property as described in #1 above. For obvious reasons, this arrangement can create more trouble and family disputes than might have occurred had the property gone through an organized probate proceeding and remained in the control of a single designated personal representative.
- Gifting Real Estate: In his or her later years, a parent will sometimes transfer ownership of his or her home or other real estate to a trusted adult child or children, generally through a quit claim deed and often reserving a life estate. The purpose of this arrangement is usually to avoid probate upon death. There are numerous potential issues with this arrangement, some of which are outlined below:
- Gifting – Presently, you can gift up to $14,000 per year per beneficiary without incurring any gift tax consequences. If the value of your real estate is greater than this amount, then you are legally required to file a gift tax return and incur any gift tax consequences associated with the transfer.
- Creditor Issues – Once your child becomes the owner of your real estate, your real estate will then become subject to the claims of his or her creditors. Therefore, if your child gets sued or files for bankruptcy, then your real estate could end up in the hands of his or her creditors. Since medical expenses remain the most common cause of personal bankruptcy, this can be a concern even for the most responsible adult children. Your real estate could even become an issue within your child’s divorce proceeding!
- Capital Gains – When you gift an asset to a beneficiary during your lifetime, that child inherits your original cost basis as to the interest gifted. Conversely, had your child inherited your real estate upon your death, the asset would have received a “step-up” in cost basis on your date of death resulting in a possible reduction or elimination of the capital gains tax upon subsequent sale of the real estate. Therefore, use caution when implementing a gifting strategy with a large or highly appreciated asset unless you have first consulted with an estate planning attorney and a CPA.
By employing other estate planning techniques, you can better accomplish your estate planning objectives without putting your real estate at risk. For example, you could create a revocable living trust then title the real estate in the name of this trust.
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