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| Phillip G. Gubler and Thomas J. Bayles, Attorneys at Law |
Pitfalls of
Estate Planning by Deed
“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.
A good solution
to these issues is to utilize a revocable living trust prepared by a capable
estate planning attorney.
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 15 years. Please visit our web site www.jensenbayles.com
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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