Is Transferring the House to Children a Good Idea?

Clients frequently ask this question, especially as mom or dad is aging and perhaps living in assisted living or some other senior care arrangement.  Many try to do so using online forms, and find later that it was a mistake.  Transferring your house to your children while you’re alive may avoid probate, but gifting a home also can mean a rather large and unnecessary tax bill or could effect eligibility for long term care benefits. It also may place your house at risk, if your children get sued or file for bankruptcy

You also could be making a mistake, if you hope it will help keep the house from being consumed by nursing home bills.

There are better ways to transfer a house to your children, as well as a little-known potential fix that may help even if the giver has since died, says Considerable’s recent article entitled “Should you transfer your house to your adult kids?”

If a parent signs a quitclaim to give her son the house and then dies, it can potentially mean a tax bill of thousands of dollars for the son.

Families who see this error in time can undo the damage, by gifting the house back to the parent.

People will also transfer a home to try to qualify for Medicaid, but any gifts or transfers made within five years of applying for Medicaid can result in a penalty period when seniors are disqualified from receiving benefits.  A capable elder law attorney can advise you on better ways to address this, as well as potential corrections if necessary.

In addition, transferring your home to another person can expose you to their financial problems because their creditors could file liens on your home and, depending on state law, take some or most of its value. If the child divorces, the house could become an asset that must be divided as part of the marital estate.

Section 2036 of the Internal Revenue Code says that if the parent were to retain a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift. However, there are rules for what constitutes a life interest, including the power to determine what happens to the property and liability for its bills.

There are other ways to avoid probate. Many states and DC permit “transfer on death” deeds that let homeowners transfer their homes at death without probate.  Texas has both transfer on death deeds and “Lady Bird Deeds,” and an attorney can advise you on the differences and the best way to utilize them with your estate plan.  An excellent solution is to use a living trust which allows assets it owns or receives at death to avoid probate.  Having the trust own the property, or possibly using a deed to convey the property to the the trust at death, are excellent solutions.

If you are interested in learning more, please see this article for various ways to own and hold real estate.  https://www.galliganmanning.com/how-to-own-your-real-estate/  

In sum, there are many unexpected consequences to transferring your home to your children, so it is important to discuss the best way to convey the home to your loved ones with an attorney.

Reference: Considerable (Sep. 18) “Should you transfer your house to your adult kids?”

Continue Reading Is Transferring the House to Children a Good Idea?

Common Mistakes Made on Beneficiary Designations

Assets like life insurance, retirement accounts and annuities are governed by beneficiary designations.
Assets like life insurance, retirement accounts and annuities are governed by beneficiary designations which override your will.

Many accounts and other assets are governed by beneficiary designations. Examples include life insurance, 401(k)s, IRAs, and annuities. These assets rely on contractual provisions with the financial institution to designate who receives the benefits upon the death of the owner.

Kiplinger’s recent article entitled “Beneficiary Designations – The Overlooked Minefield of Estate Planning” describes several mistakes that people make with beneficiary designations and some ideas on how to avoid problems for you and your family members.

Believing that Your Will is More Powerful Than It Really Is. Many people mistakenly think that their will takes precedence over a beneficiary designation form. This is not true. Your will controls the disposition of assets in your “probate” estate. However, the accounts with contractual beneficiary designations aren’t governed by your will because they pass outside of probate. That is why you need to review your beneficiary designations whenever you review your estate plan.

Allowing Accounts to Fall Through the Cracks. Inattention is another thing that can lead to unintended outcomes. A prior employer 401(k) account can be what is known as “orphaned,” which means that the account stays with the former employer and isn’t updated to reflect the account holder’s current situation. It’s not unusual to forget about an account you started at your first job and fail to update the primary beneficiary, which could be a former spouse.

Not Having a Contingency Plan. Another thing people don’t think about is that a beneficiary may predecease them. It is important to name a contingent or secondary beneficiary in the event the first beneficiary is not survivig.

Not Paying Attention to a Per Stirpes Election. If a person names several beneficiaries (such as children) as primary beneficiaries to share equally in the account or life insurance policy at the owner’s death, what happens if one of the beneficiaries is not surviving? Some beneficiary designation forms state that the deceased beneficiary’s share automatically goes to the other surviving beneficiaries. Other beneficiary designation forms give the owner the option to state that the deceased beneficiary’s share should pass to the deceased beneficiary’s children. This is known as a per stirpes election. Many times people are unaware as to which option they have chosen on the beneficiary designation form.

Naming a Minor or Incapacitated Person as a Beneficiary. If a minor or incapacitated person is named as beneficiary, unless the beneficiary designation form allows for the appointment of a custodian or trustee to accept the benefits on behalf of the minor or incapacitated person, a court-appointed guardian may be necessary for the minor or incapaciated person to receive the benefits. Also keep in mind that if an incapaciated person you’ve named as beneficiary is receiving government benefits, distributions from a retirement account, annuity, or life insurance policy, may jeopardize his or her eligiblity to receive the government benefits.

It’s smart to retain copies of all communications when updating beneficiary designations in hard copy or electronically. These copies of correspondence, website submissions and received confirmations from account administrators should be kept with your estate planning documents in a safe location.

Remember that you should review your estate plan and beneficiary designations every few years to make sure that they are coordinated and that they say what your really want.

You may also be interested in https://www.galliganmanning.com/trust-owned-life-insurance-in-your-estate-plan/.

Reference: Kiplinger (March 4, 2020) “Beneficiary Designations – The Overlooked Minefield of Estate Planning”

 

Continue Reading Common Mistakes Made on Beneficiary Designations

Estate Planning Mistakes by Famous People

Many estate planning mistakes by famous people illustrate on a grand scale what applies to all of us; the need for an up-to-date, quality estate plan.

The instructions for the disposition and management of one’s estate at death through the use of wills, trusts, and other devices can cover almost about any topic you can think of. While the majority of instructions in estate planning concern finances, wills and trusts frequently guide decisions regarding health care, guardianships, business, education and even which heir gets the entire Barry Manilow record collection.

Born2Invest’s recent article entitled “The biggest estate planning blunders of all time” looks at a few colossal estate planning mistakes by the rich and famous.  Estate planning mistakes by famous people show you what can go wrong in the worst of ways.

Estate planning usually conjures up thoughts of drafting a will by an attorney. Although the cost of drafting an estate plan varies significantly based on location and complexity, it can range from a few hundred dollars to several thousand. Regardless of the cost, hiring an experienced estate planning attorney will save your family time, money and anguish after your death.

With that said, let’s take a look at some estate planning mistakes by famous people who simply didn’t get around to this very important task.

Ted Williams (Baseball Legend). When Ted died in 2002, he had one will that said his body should be cremated, and another that instructed he should be cryogenically frozen. As you can imagine, there was a fight among his children. This resulted in Ted’s decapitation (postmortem). Therefore, the Splendid Splinter, the greatest baseball hitter of all time, had his body and head frozen in Arizona at Alcor Life Extension Foundation.

Sonny Bono (Singer and Congressman). Sonny didn’t create a will. As a result, he passed away intestate. A lawsuit was initiated by ex-wife and singing star, Cher, to collect $1.6 million in unpaid alimony, along with a fraudulent claim by an illegitimate child (disproven by DNA testing), and Sonny’s widow, Mary.

Heath Ledger (Actor). Heath failed to revise his will after the birth of his daughter. At his death in 2003, his entire estate was split between his parents and sisters, but they agreed to give all the money to his daughter.

Philip Seymour Hoffman (Actor). The Oscar-winning actor also never updated his will after the birth of his two daughters. Since he wasn’t married to his then girlfriend, there was an approximate $12 million estate tax that was owed.

Joe Robbie (the owner of the NFL Miami Dolphins). Robbie had a substandard estate plan that contained a pour-over will and revocable inter vivos trust. This was designed to defer estate taxes until after the death of his wife. However, it didn’t work as planned. She demanded her “elective share” as spouse, 30% of the husband’s illiquid estate, which created a $47 million tax bill that could only be settled by selling off his football team. His 11 children also went to court to fight over his estate.

James Brown (Singer). The “Godfather of Soul” wasn’t around to witness the 12-year epic legal battle among several blended families over his estate.

Barry White (Singer). White died in 2003 in the middle of divorce proceedings. Legally speaking, he was still only separated from his wife. As a result, she got it all, instead of his current girlfriend and mother of nine kids.

There are many more famous people who posthumously became members of this dubious club. Their eligibility for membership was poor estate planning that resulted in unintended—and in some cases, tragic—consequences. Although many Americans can’t really identify with these mega-wealthy or public icons, they do have assets and families and friends, and everyone should expect to need an estate plan.  See here for ideas on how to do it properly https://www.galliganmanning.com/a-will-is-the-way-to-have-your-wishes-followed/

The club of estate planning mistakes by famous people shows the rest of us the need for proactive professional planning. Be certain that you work with a qualified estate planning attorney, so that your estate plan doesn’t end up like the ones above.

Reference: Born2Invest (January 27, 2020) “The biggest estate planning blunders of all time”

Continue Reading Estate Planning Mistakes by Famous People