Pitfalls Of Estate Planning By Deed

Dec 27, 2016 | Estate Planning, Trusts, Wills and Probate

“Are there any problems with including my adult child on a deed as a joint tenant holder so the child receives the real estate at my death?”  “Are there any problems with providing a deed to a child with instructions not to record the deed until death?”  “What if I just deed my real estate to my children while I am alive?”  These are all questions I hear with significant frequency.  The motivation appears to be a desire to avoid probate, but probate may be the least of one’s problems if one utilizes any of the above scenarios.

There are a few problems that may arise if you rely upon your child to “do the right thing.”  First, the child may not carry out your wishes on death thereby disinheriting your other children.  An example of this arises in a Utah court case in which a parent transferred real estate to a child in order to qualify for Medicaid.  The child, by oral agreement, was supposed to transfer a half interest in the real estate to his sibling upon death of the parent.  The child failed to make the transfer to his sibling, the sibling sued, but the court refused to provide a remedy to the sibling under the theory that the law will not provide a remedy to parties scheming to circumvent the law and qualify for Medicaid.  Second, if your child holds title to your real estate with you as joint tenants then the child’s signature is required to sell the real estate or obtain a mortgage.  What if your child refuses to sign?  Third, if your child has creditors you may be forced to defend your real estate against attacks by your child’s creditors.

An outright transfer of real estate to another for less than fair market value triggers gift tax and the requirement to file a gift tax return with the IRS on any amount over $14,000.00 (2016) per year.  You may have gift tax credit that will save you from paying tax out of pocket, but you must file the gift tax return.  A transfer to a child as joint tenants may be viewed as a gift of one-half the value of the real estate which may also be subject to the gift tax and its filing requirements.

An additional tax issue is the loss of an income tax benefit if you transfer investment real estate to your child during your life.  If your tax basis in the real estate you transfer to a child during your life is $100,000.00 then your child’s tax basis will also be $100,000.00.  If your child then sells the real estate for $150,000.00 there will be a capital gain tax on the $50,000.00 difference between the tax basis and the sales price.  If your child receives the investment real estate as a result of your death by will or trust then Section 1014 of the Internal Revenue Code generally provides that your child can reset the tax basis to the fair market value of the real estate on the date of your death.  Thus, if the fair market value is $150,000.00 on your date of death and the child sells the real estate the day after your death your child will not be required to pay capital gain tax on the real estate.

A deed signed by a parent with the understanding the child is to record the deed on the death of the parent is subject to all of the foregoing problems and may also fail to transfer valid title.  For a valid transfer to occur the deed has to be delivered or the deed must meet the requirements of a valid will.  This method is fraught with problems and should be avoided.

JensenBayles, LLP provides a broad spectrum of legal services.  Thomas J. Bayles has been actively providing advice in the areas of trusts, wills, probate and tax planning in the St. George area for over 18 years. Please visit our web site or call 435-674-9718 and ask for Thomas J. Bayles. The information in this article is for educational purposes only and is not intended to be construed as tax or legal advice.

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